A Better Way to Tax U.S. Businesses

Of all the policy changes that could improve the competitive position of the United States and the living standards of Americans, revamping the corporate tax code is perhaps the most obvious and least painful. High corporate taxes divert capital away from the U.S. corporate sector and toward noncorporate uses and other countries. They therefore limit […]

by

Mihir A. Desai

by

Mihir A. Desai

From the Magazine (July–August 2012)

Summary.

Reprint: R1207N

The U.S. corporate tax code is broken. High rates and perverse incentives drive capital away from the corporate sector and toward other uses and countries. This is bad news for U.S. workers, because corporations aren’t making investments that would increase productivity and real wages. And while one might think higher rates lead to higher revenues, the U.S. actually collects less in taxes (as a percentage of GDP) than most other developed nations.

Desai, a professor at Harvard Business School and Harvard Law, believes a handful of changes could fix all that. A significant rate reduction and an end to foreign-income tax would encourage U.S. multinationals to keep more money at home. Any revenue lost could be offset by a small tax on noncorporate business income, which is now exempted. Closing the chasm between how income is reported on taxes and earnings are reported to investors would also raise revenue—and end public perceptions of unfairness.

These reforms could actually turn the U.S. tax system into an asset. But they won’t be effective if managers don’t change their mind-set. Rather than shirking their tax obligations, they need to start viewing them as an important social responsibility.

Of all the policy changes that could improve the competitive position of the United States and the living standards of Americans, revamping the corporate tax code is perhaps the most obvious and least painful. High corporate taxes divert capital away from the U.S. corporate sector and toward noncorporate uses and other countries. They therefore limit investments that would raise the productivity of American workers and would increase real wages. This is the cruel logic of a corporate tax in a global economy—that its burden falls most heavily on workers.

A version of this article appeared in the July–August 2012 issue of Harvard Business Review.

Mihir A. Desai is the Mizuho Financial Group Professor of Finance at Harvard Business School and a professor of law at Harvard Law School.

A Better Way to Tax U.S. Businesses

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