Manual Dual Income Tax: A Proposal for Reforming Corporate and Personal Income Tax in Germany

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There is no obvious economic reason why the US should choose a quantum tax-system change that bears much more heavily on US production that involves foreign value added which includes sectors that are high-wage, high-value, and high- tech and favors purely US production which tends to be low value-added. Two, there is a strong popular sentiment against trade—as has been common in our modern history whenever the US economy has been perceived to perform poorly.

A Proposal for Reforming Corporate and Personal Income Tax in Germany

Neither of these motivations would seem a sound basis for quantum choices about permanent US tax policy. To export successfully, a nation must import.

Key Findings

Another broad general path toward better corporate tax policy is change along the lines of the Tax Reform Act of This Act eliminated a number of significant corporate tax preferences and used the proceeds to reduce the statutory corporate tax rate. After its enactment, the United States had one of the lowest statutory corporate tax rates in the developed world. Since that time, the United States essentially has stood still, while other nations have outdone us in statutory rate reduction, leaving us with the highest statutory rate in the OECD.

An aggressive repeat of the tax reform could achieve substantial rate reduction from the current 35 percent to perhaps 28 percent without losing revenue. However, at this time, there are not enough remaining corporate tax preferences to repeal that could achieve a statutory corporate tax rate below that of our international competitors without losing revenue. However, policymakers should keep in mind that, while tax rates matter, not all business activity has moved to the developed nation with the lowest corporate tax rate. Proximity reduces transportation costs.

If such a location gives proximity to talented labor and natural resources, including low energy costs and efficient regulation, so much the better. And nearness to the sales market always allows a better understanding of and quicker and more accurate response to the wishes of the customer.

Thus, the corporate tax rate is only one factor in business location decisions, and the United States will be a highly attractive location if we have a competitive—even if not the lowest—tax rate. However, there is the clear concern that adopting a VAT could reduce the pressure on policymakers to reduce spending and eliminate income tax preferences, which could have compounding repercussions in the future.

House Speaker Paul Ryan has put forward a comprehensive tax reform proposal.

Its corporate tax component is based on a DBCFT, with expensing of corporate investment, eliminating the deductibility of interest, and eliminating the foreign tax credit, consistent with the description of the DBCFT above. One concern is that the Ryan plan could entail a significant revenue loss, which would make it more difficult to attain fiscal sustainability in the foreseeable future, although the most optimistic revenue estimate published would have the plan as revenue neutral.

It would tax foreign profits currently thereby eliminating deferral , although it would cut the US statutory corporate tax rate substantially. It would have a mandatory repatriation of current untaxed foreign profits. The plan would allow expensing corporate investment, but still allow some deduction of interest expense subject to an unspecified cap—thus, possibly allowing tax shelter opportunities. Perhaps most unusual, it would create a separate rate for pass-through entities—equal to the corporate rate, but lower than the top bracket individual rate.

This feature has caused serious concern among tax policy and tax administration professionals because it appears to invite upper-income individuals to create their own personal service corporations for labor income and investment corporations for investment income so as to migrate their income from the statutory top individual tax bracket into the preferential lower rate for pass-through entities. Given the potentially large tax savings for individuals who would benefit from this provision, it is likely that considerable legal expense would be invested in attempts to circumvent any preventive regulations.

There is no silver bullet by which corporate tax reform can simultaneously maximize all of the stated objectives; trade-offs are unavoidable.


Eliminating Double Taxation through Corporate Integration

History is replete with proposals of radical new tax ideas that have been argued to have enormous advantages. But there is an inherent limitation to all such alleged great leaps forward.

The Progressive Income Tax: A Tale of Three Brothers

Except for highly unusual circumstances of fiscal plenty, any replacement tax must generally collect as much revenue as the tax it replaces. Collecting the same amount of tax in a radically different way is likely to create many happy winners and just as many unhappy losers.

The German proposal for an effective minimum tax on multinational’s profits

But perhaps even more important, in a truly radical tax change, the economic enterprises that are the worst losers may not be able to survive, which would have broader economic consequences. Policymakers should consider the potential fallout of such dislocation carefully, along with the important role in economic growth of simple deficit reduction. CED has recommended incremental, but significant, reform: A firm that undertakes a large investment in a particular year may have substantial depreciation deductions in that and a few succeeding years.

In our view, forcing that firm to pay more in corporate income taxes in those few years, and then giving the suspended depreciation deductions back in later years, serves no enduring purpose. The same can be said of suspending operating losses if a profitable firm happens to have a few bad years.

The incentives for firms to manipulate the timing of their investments to avoid falling prey to the AMT likewise serve no economic and social purpose. We believe that any genuine tax preferences that are appropriately included in the AMT would better be eliminated outright for purposes of the ordinary corporate income tax, with the revenue gained applied to general corporate tax rate reduction. Reduce the statutory corporate tax rate as much as possible. The lower the statutory corporate income tax rate, the greater the attractiveness of earning profits in the United States.

The lower the statutory tax rate, the less the economic distortion caused by any remaining tax preferences and the less the difference between the tax charged on any ordinary income and that on any preferred uses.

The German proposal for an effective minimum tax on multinational’s profits

Maintain the general current-law treatment of pass-through entities. With lower and equal statutory corporate and top-bracket individual tax rates given that much of the income from pass-through entities is taxed at the highest individual rate , the potential for manipulation of either form could be minimized with sound regulation and administration.

Maintain the current deferral of taxation of profits of US-based multinational corporations, and the foreign tax credit when those profits are repatriated. Conversion to a territorial system has strong support. However, the revenue loss that would accompany a true territorial system is problematic. Therefore, we recommend continuation of the deferral system as an appropriate compensation for US-based firms that compete with other firms operating under territorial systems.

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If policymakers choose a territorial tax system as a high priority, then some additional sources of budget savings will be essential. The deficit problem looms so large that good options already may be scarce. This policy brief has focused on the policy considerations surrounding the corporate income tax. For reasons noted above, we believe that true reform of the corporate income tax cannot be achieved in total isolation from the status of the individual income tax. A reformed individual income tax should make it possible to reduce the corporate income tax burden and, therefore, to increase the competitiveness of US producers and job creators.

CED urges all business leaders to engage in an open and respectful dialog about corporate tax reform.

Dreaming On

That dialog should include expressions of concern about adverse consequences of a loss of competitiveness of US-based firms. But businesses must thrive if they are to play their part throughout a long and prosperous future for all Americans. George A. Plesko and Eric J. Several of the largest tax expenditures for example, the home mortgage interest deduction are available only to individuals.

The Treasury produces a table that reports only those tax expenditures available to corporations. Some other tax expenditures were created by legislators to incent particular forms of behavior that were considered beneficial. This discussion has implications for the legislative process. One of the most important objectives of trimming corporate tax preferences is to allow reductions in the corporate tax rate. However, many tax preferences that are used by Subchapter C corporations also are available to pass-through entities that pay under the individual income tax.

When corporate tax reform cuts or eliminate preferences, those Subchapter C corporations are compensated by reduction of their statutory tax rates. However, pass-through firms paying under the individual income tax receive no such compensation—unless there is simultaneous fundamental reform of the individual income tax as well. Although certain focused changes of the corporate income tax may be possible in isolation, the broader the corporate reform that is attempted, the more that the individual income tax must be changed in parallel. Intangible assets are much easier to move between countries than, say, a manufacturing plant.

He suggested that the comprehensive income tax should be replaced by a system involving a flat rate of tax on capital income - at the level of the corporate income tax rate - combined with progressive taxation of the taxpayer's total income from other sources. The proposal was taken up by a committee appointed by the Savings Bank Association Sparekasseforeningen that in the early s prepared a discussion paper for a tax reform. The discussion paper was subsequently to serve as the basis for the tax ministers negotiations with the opposition on a tax reform.

The Danish minority government did propose a dual income tax in the spring of , but the opposition was reluctant to give up the idea of progressive taxation of capital income. The final tax reform of included some amount of progressive taxation of capital income, but the top marginal tax rate on capital income 56 percent was less than the top marginal tax rate of labour income 68 percent. It was thus not a pure dual income tax that was introduced in Denmark in , but the Danish tax system moved considerably away from the comprehensive income tax. Bradford, Alan J.

Bernd Huber, Slemrod, Joel, Devereux, Michael P. Discussion Papers. Michael P. Feldstein, Martin, Martin Feldstein, Bonds, Stephen R. Jack Mintz, Sorensen, Peter Birch, Scott Newlon, Zidar, Kosonen, Tuomas, Claudio M. Kraemer, Devereux, Michael P Devereux, Margit Schratzenstaller, Siemers, Lars-H.