The International Monetary Fund has made a statement in which it has asked for a comprehensive reform of the US tax system in the upcoming election year. The reforms that have been noted are a look into getting rid of the exemptions, rebalancing the direct and indirect taxation policies, and bringing in an overall simplicity to the way taxes are levied and collected.
According to a review committee on the IMF, the corporate and personal tax structure is too complex. The base is narrow, high marginal rates, unintelligible tax cuts and exemptions, all of which make paying taxes either too burdensome or simply make it in such a way that a certain percentage of the tax paying community finds a way to completely avoid paying them.
Corporate taxes in the US
If there is a reform in taxes, it could lead to a revitalized business dynamic in the economy. As an addition, there can also be a streamlining and rate reduction of business tax expenditures. The current system incentivizes debt financing with a range of tax avoidance mechanisms already in place. The recommendation is that these avoidance mechanisms be tightened and a reduction in income stripping rules be brought in.
The report also noted that the problems in the US tax policy is an issue that both parties readily accept and see as a platform where change is required, albeit in different perspectives and based on different ideologies. The statutory rate of tax is quite high, right now around 35%, which is among the highest in the developed world. What this invariably does is brings in a climate where corporates begin to look for ways to avoid paying taxes, which is easily achieved by the many legal gaps in the system.
Debt financed business favored
In the current system, interest is deductible from earnings, but dividends are taxed. By doing this, investments are made a lot more profitable in projects that are debt financed. What this also does as a spillover is that massive multinationals can deduct almost all of their domestic interest expenses including foreign investments supported by debt.
The system has a number of inherent flaws that the US government has to recognize and work on, they said. The IMF also stated in their report that certain definitions related to corporate residence and inversion have to be modified. Whether or not these recommendations will be taken up seriously is yet to be seen.