Auerbach, Alan J., “A Modern Corporate Tax,” University of California, Berkeley, 12/01/10

“The U.S. corporate tax system debuted more than 100 years ago and has evolved little to meet the challenges of today’s economy. The country would benefit greatly from a reform of this system that maintains corporate tax revenues while increasing incentives for businesses to locate, invest, and produce in the United States, thus offering the prospect of higher wages and better job opportunities for American workers.

At its peak in the 1960s, the U.S. corporate income tax accounted for more than one-fifth of all federal revenues, making it the second most important federal revenue source after the personal income tax. Figure 1 shows that since then corporate tax revenues have declined as a share of national income and total federal revenues. After the major Reagan-era tax cuts in 1981, the corporate tax has provided less than 12 percent of federal revenues in all but four fiscal years, during the period 2005–2008, when a booming financial sector generated temporarily high profits and tax revenues. Few analysts expect a rebound back to those levels….

…Instead of using either corporate residence or the source of production to determine the tax base, I propose to use the destination principle, collecting tax on the basis of where a corporation’s products are used.

The destination principle is already familiar in the context of taxation, because it is the approach used around the world in the implementation of value-added taxes (VATs). Under the VAT, the destination principle is applied through border adjustments, which impose the VAT on all imports and rebate the tax previously collected on domestic production that is exported. Imposing border adjustments serves to make the VAT a tax on all domestic consumption, but another important feature is that it eliminates the incentive that domestic producers would otherwise have to engage in profit shifting for tax purposes.”