America’s corporate tax structure is outmoded, encouraging borrowing relative to other forms of financing and contributing to the private debt burden. A reformed corporate tax would limit negative externalities on the U.S. economy while preserving its role as an important source of federal revenue.
Two changes to the current system would establish a more economically effective corporate tax. The first would be an immediate deduction—rather than depreciated allowances—for all investments. The second would be the approach of taxing only transactions that occur exclusively within the United States, rather than taxing both U.S. and foreign-source income.
The U.S. corporate tax system introduced more than 100 years ago has not kept pace with changes to the economy. The growing role of financial innovation and the increasingly global nature of U.S. corporate operations are chief among these changes, necessitating reform. This paper proposes two reforms to the U.S. corporate tax system: first, an immediate deduction for all investments that would replace the current system of depreciation allowances, and second, replacing the current approach to taxing foreign-source income with a system that ignores all transactions except those occurring exclusively in the United States. These changes would eliminate existing incentives to borrow and shift profits abroad while maintaining the corporate tax as a progressive revenue source.