The Cash Flow Corporate Income Tax

Abstract

The current debate on tax reform has raised again the question of how thecorporate tax system should be altered. The cumulative effect of piecemeal changes to the tax system has been to produce major distortions in thepattern of savings and investment and falling revenue in real terms. Toovercome these problems, reform, both in the US and UK, has focussed onways to tax the real economic income of companies. The main problems withthis approach are the difficulties of (a) indexing the tax treatment ofincome from capital in a comprehensive manner and (b) defining economicdepreciation. This paper discusses and alternative way to obtain theobjective of fiscal neutrality without a significant erosion of the taxbase. The implications of such a cash flow corporate income tax forfinancial and investment decisions are discussed both theoretically and interms of potential and administrative and practical problems ofimplementation.