A Stanford GSB professor proposes a new tax model to help companies grow — without shrinking government coffers
When the U.S. corporate tax rate was lowered from 35% to 21% in 2017, supporters claimed it would fuel economic growth and job creation, while critics decried the cut as an unnecessary giveaway to the wealthy.
From the perspective of Benjamin Hébert, an associate professor of finance at Stanford Graduate School of Business, and Eduardo Dávilaopen in new window, an assistant professor of economics at Yale, these debates over tax cuts and hikes are too narrow. They believe that more fundamental changes to corporate taxation not only are needed but also would benefit corporations and society alike — without shrinking the public purse.
In the U.S. and many countries, corporations’ profits are taxed — with deductions allowed for debt interest but not equity payouts. This approach makes it cheaper for firms to finance their growth with debt than equity. That has spurred criticism from economists who see it as potentially encouraging the type of excessive debt financing that contributed to the financial crisis in 2008.
Hébert points out that in focusing on what should and should not be tax deductible, policymakers accept the premise that the best way to tax firms is to calculate their profits, shave off deductions, and apply a tax rate to what’s left over. But corporate taxes don’t have to work like that, he says. “It’s not a law of the universe. It’s a choice that our government and others have made.”
In a new working paper, Hébert and Dávila step back from the status quo to pose a broader question: What is the best way to tax corporations so that government, business, and societal interests are balanced?
This piece originally appeared in Stanford Business Insights from Stanford Graduate School of Business. To receive business ideas and insights from Stanford GSB click here: (To sign up: https://www.gsb.stanford.edu/insights/about/emails)