by Mitch Kokai
Senior Political Analyst, John Locke Foundation
While the John Locke Foundation has advocated that North Carolina move toward a form of consumption tax known as the USA Tax, Ramesh Ponnuru writes for Bloomberg.com that the federal tax debate also involves discussion of a consumption tax. In this case, the target is businesses. The proponent is U.S. Rep. Devin Nunes, R-Calif.
He suggests a new approach: a “business consumption tax” that treats all businesses the same, whatever their organizational form. Instead of taxing their income, it taxes their cashflow — income minus expenses, except for interest payments. That way, businesses would no longer write off their investments according to a complicated depreciation schedule. Investments would be tax-free.
Both U.S. and foreign companies would have more reason to invest here, Nunes says. “This would make the U.S. the largest tax haven in human history.”
I’ve run across two objections to Nunes’s idea. The first is that it is simply too ambitious to be politically viable: If Congress is having trouble reforming the corporate tax, goes the argument, it won’t be able to digest an entirely new approach to taxing business income. What this objection ignores is that the moderately ambitious proposals all face obstacles that are probably insuperable — obstacles this proposal avoids.
The second objection is that Nunes’s proposal would cost the federal government a lot of revenue. A Joint Committee on Taxation estimate of the proposal’s budget impact would make it possible to evaluate this claim, but it sounds plausible. If it turns out to be expensive, though, the concept can still work: The tax rate would just have to be higher than the 25 percent that Nunes has tentatively put forward.
Even if the rate were left at the 35 percent that currently applies to corporations, the shift to the new tax would still be a boon for the economy. The statutory rate would be higher than that of other countries, but the number that matters — the effective tax rate on investments — would be a very competitive zero, thanks to companies’ ability to write off their costs immediately. Eliminating the deduction for interest, meanwhile, would end a destabilizing distortion in the economy: the federal tax code’s preference for corporate financing via debt rather than equity. That preference also gives an advantage to established firms that have greater borrowing capacity than startups.
HT: Rick Henderson