The debate over corporate taxation has shifted from “fix the base, raise the rate” to proposals that an ideal tax base could support an 80 percent top corporate income tax (CIT) rate. Reuven Avi‑Yonah’s forthcoming paper argues that, after reforms such as full expensing and a destination‑based cash‑flow tax (DBCFT), the usual concerns about high rates disappear, allowing a progressive top rate of 80 percent on global profits above $10 billion in a de‑globalizing economy.
Why an 80 % rate remains problematic
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Full expensing does not eliminate rate effects.
In the Hall‑Jorgenson user‑cost model, full expensing sets the cost‑recovery factor z = 1, removing the tax rate τ from the investment condition c = r + δ. The model, however, omits real‑world elements that are not fully deductible, such as founders’ “implicit wages” and loss‑carryforward limitations. When these are included, the tax rate re‑enters the calculation. -
Empirical illustration of rate sensitivity.
Using an estimate that a founder’s unpaid effort equals half of the capital outlay, raising the corporate rate from 21 % to 80 % would increase the required pre‑tax return on an investment by roughly 114 %. By contrast:- 21 % → 31 % raises the required return by ≈ 6 %.
- 70 % → 80 % raises it by ≈ 31 %.
The marginal cost of a rate increase is modest at low rates but becomes very large as the rate approaches the high end.
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Profit‑shifting considerations.
A DBCFT—denying deductions for imports while exempting export income—closes major profit‑shifting channels, but it does not remove the need for higher rates to raise revenue. Higher rates still generate larger distortions, especially for firms that can more easily shift profits. -
Progressive rate structure creates asymmetry.
Taxing early‑stage costs at a low rate (e.g., 21 %) while applying an 80 % rate to later profits raises the user cost of capital. The timing of deductions, the ability to elect out of bonus depreciation, and the treatment of loss‑making startups (55 % of venture‑backed firms founded 1985‑2009 terminated at a loss) all re‑introduce the tax rate into investment decisions. -
Non‑symmetric treatment of gains and losses.
When cost offsets are not symmetric with the taxation of gains—such as when deductions are delayed or never realized for loss‑incurring firms—full expensing alone cannot neutralize the impact of the tax rate.
Practical takeaways
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Base reforms matter, but they lower, not eliminate, the cost of modest rate hikes. Broadening the base through full expensing and border adjustments reduces the economic burden of a given rate, making small increases less distortionary.
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Very high rates remain distortionary. Even with an ideal base, an 80 % top rate would substantially raise the required return on investment, discouraging capital formation and potentially prompting profit‑shifting or relocation.
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Policy design should balance base improvements with realistic rate levels. Pursuing a destination‑based cash‑flow tax or full expensing can improve efficiency, but policymakers must recognize that rates above the moderate range impose steep economic costs.
Source article: taxfoundation.org
