The Cash Flow Corporate Income Tax

The current debate on tax reform has raised again the question of how the
corporate tax system should be altered. The cumulative effect of piece
meal changes to the tax system has been to produce major distortions in the
pattern of savings and investment and falling revenue in real terms. To
overcome these problems, reform, both in the US and UK, has focussed on
ways to tax the real economic income of companies. The main problems with
this approach are the difficulties of (a) indexing the tax treatment of
income from capital in a comprehensive manner and (b) defining economic
depreciation. This paper discusses and alternative way to obtain the
objective of fiscal neutrality without a significant erosion of the tax
base. The implications of such a cash flow corporate income tax for
financial and investment decisions are discussed both theoretically and in
terms of potential and administrative and practical problems of
implementation.