There is increasing interest in reforming the corporate tax code, including a proposal by the Obama administration to, among other steps, limit deferral of foreign source income. However, there is little agreement on what that reform should look like.
A new ITIF report, Effective Corporate Tax Reform in the Global Innovation Economy, examines the issue of corporate tax reform and lays out six key principles for policymakers to consider as well as specific policy recommendations for crafting an innovation-based corporate tax code. These principles are:
- Principle 1: Differentiate between individual taxes and corporate taxes and focus on making the individual tax code more progressive.
- Principle 2: An effective corporate tax code is neither simple nor neutral.
- Principle 3: An effective corporate tax code should explicitly spur innovation and productivity.
- Principle 4: Nations need competitive corporate tax systems in a global economy.
- Principle 5: Tax reform should shift revenue collection from mobile sources of economic activity toward immobile ones.
- Principle 6: Recognize that international tax competition is here to stay.
Based on these principles, the report three key policy recommendations.
- Recommendation 1: Significantly expand the research and development tax credit, by expanding the Alternative Simplified Credit, broadening the definition of qualified R&D to include “process R&D”, and creating a more generous credit for research conducted by companies at universities and federal labs.
- Recommendation 2: Create a “knowledge tax credit” by allowing company expenditures on employee training to qualify for the Alternative Simplified R&D Credit.
- Recommendation 3: Allow companies to expense in the first year expenditures on capital equipment instead of having to depreciate it over a number of years.
Reforming the code this way would not only make the United States more competitive in the global economy, but would also spur investment in the building blocks of the growth: research, workforce training, and new capital equipment.
