The Business Enterprise Income Tax: A Prospectus

11 Pages Posted: 6 Jan 2005


Many policymakers, practitioners, and politicians have argued the case for fundamental tax reform. Reform advocates often point to the recent wave of corporate tax shelter controversies as emblematic of the Internal Revenue Code's complexity and economic inefficiency and conclude that our current income tax is a system gone irredeemably awry.

Most tax reform advocates urge that our income tax system be replaced or supplemented by a consumption tax (most often, a value added tax). This paper, by contrast, urges a genuine reformation of the income tax applicable to business enterprises. The paper's central thesis is that, in our decades-old quest for a perfect business income tax, we have failed to design a very good one. Kleinbard proposes a new business enterprise income tax that would comprise four related revisions to our current system for taxing business income:

- First, a broadening of the business tax base to impose entity-level tax on all business enterprises, whatever their form. Thus, partnerships, for example, would become taxable entities.

- Second, a comprehensive new approach to the taxation of financial capital invested in business enterprises, the cost of capital allowance system, which would eliminate current law distinctions between debt and equity, and subject all investors to current tax on their implicit returns, regardless of whether they receive current cash distributions.

- Third, the repeal of our tax-free incorporation and reorganization rules, and their replacement with a uniform asset-acquisition tax model, coupled with new tax-neutral tax rates on the disposition of business assets.

- Fourth, the replacement of our current schizophrenic consolidated return rules with comprehensive true consolidation principles.

Kleinbard argues that the resulting system would be fairer, more efficient, and simpler than current law. Most important, the business enterprise income tax should reduce greatly the role of tax considerations in business thinking.

Keywords: coporate income tax, business tax, tax reform, corporate tax shelters

JEL Classification: E62

Suggested Citation

Kleinbard, Edward D., The Business Enterprise Income Tax: A Prospectus. Tax Notes, Vol. 106, No. 97, January 3, 2005. Available at SSRN:

Edward D. Kleinbard (Contact Author)

USC Gould School of Law ( email )

699 Exposition Boulevard
Los Angeles, CA 90089
United States

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics