America’s corporate tax structure has become complex, unpredictable, and inefficient. As a result, the tax code distorts business decision-making by imposing different tax rates for similar economic outcomes, encourages tax shelters and other mechanisms to exploit uneven treatment of entities and activities, and imposes high and rising compliance costs on business taxpayers.
The proposed Business Enterprise Income Tax would tax all returns on capital in a comprehensive, systematic manner regardless of the form of that capital or who receives the returns. This tax, in tandem with a cost of capital allowance tax that would tax returns to investors, rent, and risky returns to business enterprises—would effectively function as an enterprise-level tax on all income.
This paper introduces the Business Enterprise Income Tax (BEIT), a comprehensive and detailed proposal for reforming business income taxation. Current law fails to tax all business income consistently and comprehensively. It distorts economic behavior and diverts managerial effort toward tax avoidance.
In contrast, the BEIT achieves comprehensive and consistent taxation of capital income and reduces tax-planning incentives. The BEIT integrates taxes at the corporate and the individual levels, ensuring that all income is taxed once and only once.
The BEIT eliminates current law distinctions between debt and equity. Instead, the BEIT uses its cost of capital allowance (COCA) system to tax investors on the normal (risk-free) return to capital and to tax businesses only on risky returns and rents. Under the COCA system, businesses obtain a uniform deduction for a normal return on their capital and pay tax on the rest of their income; investors include an assumed normal return in their taxable incomes, whether or not received by them in cash. (Investors also pay a small tax on gains beyond normal returns for practical and ability-to-pay reasons). In practice, the COCA system functions as a business-level consumption tax plus an add-on investor tax on normal returns.
The BEIT proposal also rationalizes the tax system by applying a single set of rules to all forms of business enterprises and business acquisitions. As a result, all business income is taxed identically and consistently, regardless of niceties of form.