Stanford Prof Talks GOP Income Tax Strategies
Stanford’s Graduate School of Business professor and former tax strategy advisor Lisa De Simone recently discussed the potential for the GOP to fix the corporate income tax system, whose rate he wants to cut from 35 percent to 15 percent. The new prospective corporate tax rate would drop the United States, currently the third highest in the world, to well below the 29.5 percent weighted average rate.
De Simone explains that both House Speaker Paul Ryan and U.S. President Donald Trump have devised plans that land close to the Republican motto of “Broaden the base and lower the rate.” In other words, closing loopholes “increases the base of income that actually gets taxed [and] lowering the rate for everyone offsets the added revenue.
The paradox about the U.S. corporate income tax rate is that while it’s one of the highest in the world, loopholes in the system enable most corporations to skirt the bill. De Simone explains that while the 35 percent tax rate has contributed to job loss, the tax burden is only one part of a more complex system.
“If you’re a CEO and you see that you can save hundreds of millions of dollars in taxes by moving your operations offshore, other things being equal, that’s what you’re going to do.” According to De Simone, many firms shift income to overseas tax havens by exaggerating “the significance of their foreign operations, [which] might be just a mailbox in Bermuda.” She believes the inherent catch-22 of the tax system “distorts business decisions.” The reported $2.6 trillion American multinational corporations have stashed overseas could be used to “invest in facilities and hire people; or build infrastructure.”
President Trump’s grand plan is to move away from global taxation toward territorial taxation in which “firms are taxed only on U.S. income,” not offshore profits, which many predict will encourage American corporations to shift operations overseas. The flip side, De Simone explains, is that by enacting a 15 percent tax rate, “you’re shrinking the tax base by excluding foreign profits, [which] might really increase the federal deficit.”
Paul Ryan’s plan proposes a “destination-based cash-flow tax,” in which “tax liability be based not on where companies generate income but on where the customer is.” The plan does away with the ability for companies to “deduct interest payments in computing their tax,” thereby distorting “the choice between debt and equity financing.”
De Simone predicts that the new GOP plan would affect retailers like Walmart and automakers who import goods to sell domestically, who would “get hit on the import side without benefiting from the tax break on exports.”
De Simone hopes that “with an undivided government, we finally have the stars aligned to make [real] reform possible.”
About the Author
Jonathan Pfeffer
Jonathan Pfeffer joined the Clear Admit and MetroMBA teams in 2015 after spending several years as an arts/culture writer, editor, and radio producer. In addition to his role as contributing writer at MetroMBA and contributing editor at Clear Admit, he is co-founder and lead producer of the Clear Admit MBA Admissions Podcast. He holds a BA in Film/Video, Ethnomusicology, and Media Studies from Oberlin College.
