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Fixing the Corporate Income Tax
By Alan Cole
Economist
Feb. 2016
No. 499
Key Findings
· The U.S. corporate income tax has a number of problems that could be
addressed through a series of reforms.
· Corporate income taxes reduce economic growth under most simple
economic models. The drag on growth from corporate income taxes could
be mitigated by moving to the full expensing of capital investment.
· A high corporate income tax rate encourages firms to shift profits to lower-
tax jurisdictions. The U.S. can reduce profit shifting by setting its corporate
income tax rate more in line with those of its trading partners.
· The worldwide system of taxation encourages corporate inversions, a
problem that could be solved by moving to a territorial system comparable
with those used in the rest of the developed world.
2
Introduction
The U.S. corporate income tax has problems.
The first of these problems is that a wide variety of empirical economic literature has
concluded that corporate income taxes are more harmful than any other tax to economic
growth.1 This is consistent with the findings of a broad theoretical framework where the
capital stock, a determinant of growth, is responsive to taxation. If the capital stock is both
responsive to taxation and a determinant of growth, then higher corporate income taxes
reduce output in the long run.
Another concern with the corporate income tax is an international one, stemming from
the general difficulty in defining corporate income as a