The treatment of companies under cash flow taxes : some administrative, transitional, and international issues

The paper begins by outlining the major administrative and compliance issues of a cash flow tax. There are problems with the system because of the numerous possibilities for gaming the system. The paper goes on to discuss the problems involved in the transition from a corporate income tax to a cash flow tax. There are ways around these problems but they cause further problems. The paper outlines these secondary problems and possible solutions to them, but concludes that there is no easy way to orchestrate a totally smooth transition. The international aspects of imposing a cash flow tax are most troublesome. After a summary of the major international income tax rules, the paper discusses how the cashflow tax treats inbound investment, outbound investment, and exports and imports. The paper concludes by proposing one way to fix up the income tax. It suggests that the tax base be defined in terms of financial income with certain specific adjustments, such as for depreciation and extraordinary items. The proposal is of some depth, including a simplified system of tax depreciation.