Both Republicans and Democrats agree that the 35 per cent corporate tax rate in the US is too high. Yet discussions over the corporate tax fizzled out during the recent fiscal cliff negotiations, partially because of the budgetary maths. Neither party has identified enough revenue increases to offset the $1.2tn cost over 10 years of lowering the corporate tax rate to a more reasonable 25 per cent.
We would like to offer a proposal: limiting the tax deductions for the interest that corporations pay on their bonds and other debt they issue. This change alone could raise the required revenue for a 10 percentage point reduction in the corporate tax rate. And this change would also improve the allocation of capital and deter excessive leverage.
Although there are three alternative approaches to financing a corporate rate deduction, none of them are large enough or politically feasible.