September 10, 1995

The Approaching State Corporate Income Tax Crisis

Download Background Paper No. 14

Background Paper No. 14

Executive Summary
Two distinct philosophies of taxation guide state tax policy. One philosophy deems the primary purpose of taxes to be revenue raising and not micromanagement of the economy or society. The other philosophy, while acknowledging that one purpose of taxes is to raise revenue, promotes the use of tax incentives as a tool in regulating economic and social conduct. This paper does not argue the merits or demerits of either philosophy, but rather it examines the state corporate income tax system solely from the standpoint of taxpayer compliance .In this connection, the principle espoused herein is that a tax system should be simple, easy to comply with and easy to understand. Tax compliance expense is a cost to society, and complicated taxation undermines voluntary compliance.

This study outlines major deficiencies in the existing state corporate income tax system. It then discusses the major new federal tax reform proposals to determine to what extent a new federal business tax system, based on operational value-added or flat tax concepts, will resolve the problems both corporate taxpayers and the states are encountering with existing state corporate income taxes, and whether a new federal tax will create new problems. The review concludes by suggesting the need for and a mechanism through which federal and state governments can cooperatively work with each other and the business community to explore the development of a modern business tax system that is equitable, easier to comply with and easier for federal and state governments to administer.

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