Deconstructing the Rules of Corporate Tax
Akron Tax Journal, Vol. 25, No. 1, pp. 1-54, 2010
54 Pages Posted: 28 Aug 2014
Date Written: August 27, 2014
The U.S. corporate tax system is failing to keep pace with the evolving global economic landscape. The overwhelmingly complex regime rewards aggressive tax planning and creates incentives for corporations to move their capital and tax homes offshore. Calls for fundamental reform are escalating as the current system succumbs to the pressures of declining revenues, ever-emerging loopholes, and the perpetuation of one of the highest national statutory rates in the world. Indeed, President Obama and members Congress have acknowledged these shortcomings and affirmed their commitment to significantly overhaul the corporate tax system. Academics, practitioners, and the White House have proposed any number of reform measures to deal with the problems plaguing the U.S. corporate tax regime, including moving from a worldwide to a territorial-based regime, eliminating deferral, and lowering the statutory rate. However, these solutions involve varying structural and statutory changes, which are in fact extrinsic to the form of the underlying rules themselves. In contrast, this Article argues for an innate form of change to the U.S. corporate tax rules, which would fundamentally affect the way in which tax lawmakers actually draft tax rules and regulations. In particular, it argues that a systemic focus and commitment by lawmakers to a more principles-based approach to regulation would significantly mitigate many of the challenges currently encumbering the U.S. tax regime. Generally speaking, as used herein, principles-based rules are rules in which the principle underlying the rule is actually stated on the face of the rule. In contrast, prescriptive rules are rules for which the lawmaker ex ante prescribes an outcome for a set of anticipated factual situations by applying, but not stating directly, the underlying principle. Unlike the present system, which relies almost exclusively on a complex entanglement of bright-line prescriptive rules, a principles-focused corporate tax regime would help significantly simplify tax provisions, close loopholes, make the system more responsive to a dynamic marketplace, and serve as a gateway to lowering the U.S. corporate tax rate. Thus, the implementation of more principles-based rules should be given consideration in any contemplated tax reform proposals.
Keywords: adaptable, corporate tax, globalization, global market, highly structured transactions, loopholes, multinational corporations, MNC, prescriptive rules, principles-based rules, self-help, simplification, social costs, statutory corporate tax rates, tax policy
JEL Classification: K34, H25
Suggested Citation: Suggested Citation