How should corporate income be taxed?

As part of the Mirrlees review of the tax system, initiated by the Institute for Fiscal Studies, researchers in the Centre have considered fundamental questions surrounding the taxation of corporate income. We identify changes both in economic theory and analysis and in real economies since the IFS’s Meade Committee made its proposals in 1978. We identify a number of problems related to both existing corporation tax systems and to the Meade Committee’s proposals. Central to these problems is the increasing importance of multinational companies in a globalised world, and the increasing difficulty in identifying differences between various forms of financial flows. We consider a number of fundamental reforms to the tax systems, distinguishing them in two main dimensions: the definition of what is to be taxed, and where it is to be taxed.

We recommend that serious consideration, including further research, be given to the possibility of levying corporation tax on a “destination” basis, along the lines of VAT, with imports taxed, but exports being tax-free. Since the tax would be levied only where the final sale takes place, there should in principle be no distortion to the location of economic activity or of profit.

“Taxing Corporate Income”, Alan Auerbach, Michael Devereux and Helen Simpson, Working Paper 07/05.