1. 1 Business Taxation and Tax Reform Glenn Hubbard Dean, Columbia Business School Presentation to Tax Reform Panel May 11, 2005

2. 2 Big Picture Goal of Reform Improve living standards Reduce complexity and wasteful tax planning Maintain tax fairness →Capital taxation is the elephant in the room

3. 3 Good Place to End Up Business (not corporate) tax on Sales- Purchases from Other Firms – Compensation – Portion of Capital Spending →Note: No interest deduction →Depreciation v. expensing (better) Household tax on compensation Distinction between income and consumption tax reform is not large

4. 4 Good Outcomes as a Consequence No taxation of investor returns; no tax distinction between debt and equity Territorial tax system Stimulus to business investment from expensing

5. 5 Business Tax Challenges Tax treatment of interest Special provisions Transition costs – NOT? →Cold turkey may be reasonable

6. 6 Household Tax Challenges Broadening the base (especially state and local tax and home mortgage interest deductions) Eliminating the separate AMT (for simplification) Evaluating bifurcated debt markets (if some interest deductions are allowed)

7. 7 Can We Get There From Here? Yes Recent tax changes point to way Distributional concerns can be satisfied (cut marginal rates, but no net tax cut for high-income taxpayers as a group)

8. 8 Is Compromise Possible? Yes Schedular system for taxing returns on saving (low, but nonzero rates on dividends and capital gains) Depreciation v. (degrees of) expensing

9. 9 How Do We Start? ‘Fundamental tax reform’ discussion ‘Clean up’ discussion Either way, early consensus building is important