Policy Documents

Moving to a Territorial System and Reforming the Corporate Tax

Daniel N. Shaviro –
January 1, 2009

As the Volcker task force evaluates base-broadening ideas,some important and meritorious reforms are unfortunately offthe table. One example would be (after the housing marketworkout has eased) replacing the home mortgage interest deductionwith a smaller, capped subsidy for homeownership that isunrelated to homeowner debt and takes the form of a refundablecredit. Surely we’ve learned from the financial crisis that encouragingexcessive homeownership (giving people undiversifiedasset portfolios), financed by excessive leverage, is undesirable.

On the business side, it’s unfortunate that the Obama administrationled off with international tax proposals whose long-termfeasibility is undermined by the difficulty of sustainingresidence-based taxation of corporate entities. Investors can alltoo easily avoid those taxes by investing through non-U.S.entities, suggesting that in the long run, the United States mayneed to follow the worldwide trend toward territorial taxation ofactive business income.