1. Business Tax Burdens and Tax Reform
James R. Hines Jr.
University of Michigan and NBER
Brookings Institution
September 8, 2017

2. Business tax reform options.
Possible business tax reform directions:
Restructure business taxes in a revenue neutral manner.
Reduce business tax rates and therefore tax collections.
It is also possible to restructure and reduce business taxes.
While the first of these clearly has the potential to improve resource allocation, it would have little effect on aggregate business tax burdens.
To be clear, reducing statutory tax rates and making up for the lost revenue by expanding the business tax base will not (much, if at all) improve aggregate business incentives – because it is not possible to reduce all marginal tax rates while keeping average tax rates unchanged.

3. Tax rates, here and there.
The 35% U.S. federal corporate tax rate is the highest among OECD countries; adding average state corporate taxes makes it 38.9%.
Only three other OECD countries have tax rates above 30%: France, 34.4%; Belgium, 34.0; and Germany, 30.2%.
Non-OECD countries also have lower tax rates (e.g. China, 25%).
Tax burdens can differ for reasons other than just statutory tax rates: there are important exclusions, deductions, and tax credits.
These favorable tax provisions are collectively known as “tax expenditures.” Prominent U.S. corporate tax expenditures are:
Favorable depreciation of capital investment, particularly equipment.
Favorable treatment of R&D expenses.
Domestic production activities deduction .
Low-income housing tax credit.
Deferral of U.S. taxation of most unrepatriated foreign income (appears as a U.S. tax expenditure only because the U.S. unlike other countries attempts to tax the foreign incomes of its resident companies).

5. U.S. corporate tax burdens.
It is possible to compare business tax burdens by adjusting corporate tax rates for favorable tax provisions.
The paper offers a method of doing so, which produces lower-bound and upper-bound tax rate estimates based on published corporate tax expenditure numbers.
Lower bound: if businesses do not respond to tax reductions by increasing the favored activity.
Upper bound: if businesses respond so much that all of the favored activity is due to tax benefits.
The 2017 U.S. estimates: 31.2 – 34.6%.
In other years the implied U.S. rates are higher still.
This places the U.S. almost at the top of the OECD even if other countries had no corporate tax expenditures.

8. Analysis of burden (…or, burden of analysis….)
It is clear that U.S. corporate taxes are high compared to any other country’s corporate taxes.
The high tax burden together with a worldwide tax system makes the United States particularly unattractive from a tax standpoint for multinational firms.
Leads to corporate inversions.
And much more importantly, it produces inversion-like outcomes in which US firms cede foreign business to foreign firms.
This pattern also raises the question of whether, even absent international competition, the current extent of business taxation makes sense.
Diamond/Mirrlees (1971): it is more efficient to tax individuals directly than to do so indirectly through business taxes.
Business taxes are also less equitable than tax alternatives that are available with a progressive individual income tax.

9. Efficient business taxes.
For any given aggregate business tax burden, efficient taxes:
Address market failures.
Impose relatively lighter burdens on more tax-responsive activities.
Both probably justify the favorable tax treatment of R&D.
To clarify: the current tax treatment encourages R&D in two ways:
Encourages firms to use R&D-intensive production.
Encourages R&D-intensive firms and industries to expand production.
Other current policies such as the domestic production activities deduction (a 9% exclusion of manufacturing-like income) make sense in the context of the tax-responsiveness and international mobility of these activities.
And the U.S. must join the rest of the world in exempting foreign income.
It is important to bear in mind that an efficient tax system does not generally level the playing field.
This reflects the second best nature of taxation.
So tax reform efforts should be loath to remove tax provisions that reduce burdens on mobile and otherwise responsive business activities.
And something must be done about the heavy current U.S. tax burdens.