Candice Horbacz
A forthcoming article in the Tax Law Review, titled “Taxation and Deglobalization,” by prominent legal scholar Reuven Avi-Yonah, posits a radical rethinking of corporate taxation. Avi-Yonah argues that with specific, fundamental adjustments to the corporate tax base, including the crucial implementation of full expensing for investments, the conventional economic concerns typically associated with a high corporate income tax rate would no longer be valid. This theoretical shift, he suggests, could pave the way for an unprecedented top marginal corporate tax rate of 80 percent, particularly targeting the supernormal returns of large corporations. This proposal, while resonating with the general sentiment of "fix the base, raise the rate" echoed by other analysts and scholars such as Kimberly Clausing, Jason Furman, Michael Linden, and Samantha Jacoby—though challenged by responses like Kyle Pomerleau’s—distinguishes itself by the sheer magnitude of the proposed rate increase, far surpassing the more modest hikes contemplated by his peers.
The Core Proposal: Base Reform and a Radical Rate Hike
Avi-Yonah’s argument hinges on the premise that a properly designed tax base can neutralize the distortive effects of high corporate tax rates on investment decisions. The centerpiece of his proposed reforms is full expensing, which allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. Proponents of full expensing argue it alleviates a bias in the tax code that discourages investment, thereby boosting productivity, wages, and job creation. Beyond full expensing, Avi-Yonah also advocates for measures designed to significantly curtail profit shifting—a pervasive strategy employed by multinational corporations to reduce their tax burden by legally reallocating profits from high-tax jurisdictions to low-tax havens.
Profit shifting, which often involves complex accounting maneuvers, intellectual property transfers, and intricate debt structures across international borders, currently necessitates higher tax rates to achieve desired revenue targets and concurrently introduces significant economic distortions. These distortions arise because businesses with greater capacity for profit shifting gain an unfair advantage, misdirecting investment towards less productive, but more tax-efficient, activities. Furthermore, the administrative and compliance costs associated with engaging in profit shifting represent economically unproductive resource allocation. Avi-Yonah’s suggested fixes aim to create a tax base less susceptible to such manipulations, thereby enhancing neutrality and efficiency.
Moving Towards a Destination-Based Cash Flow Tax (DBCFT)
A significant pathway to limiting profit shifting, as widely discussed in tax policy circles, involves transitioning the U.S. tax system towards a destination-based cash flow tax (DBCFT). A DBCFT is characterized by several key features: denying tax deductions for imports (including service imports), imposing a zero tax rate on export income, enabling full expensing for investments, and disallowing interest expense deductions. While Avi-Yonah’s specific proposals, which include a 10 percent tariff instead of denying the deductibility of imports and the introduction of a digital services tax, deviate in certain technical aspects from a pure DBCFT, they are broadly aligned with the underlying principles of such a reform.
The advantages of a DBCFT are substantial. The combination of denying import deductions and exempting export income, commonly referred to as "border adjustment," effectively closes off major avenues for profit shifting. By taxing economic activity where goods and services are consumed rather than produced, the incentive to manipulate the geographical allocation of profits is largely removed. Simultaneously, the pairing of full expensing with the elimination of interest deductions, known as "cash flow taxation," fundamentally reduces the distortive effects of taxation on investment decisions, making them more responsive to true economic returns rather than tax considerations. This framework aims to simplify the tax code, reduce compliance costs, and foster a more neutral environment for business investment.
However, Avi-Yonah extrapolates these benefits to justify an unprecedented 80 percent top marginal corporate tax rate. He asserts that once these foundational reforms are in place and the tax base is effectively immunized against profit shifting and investment distortions, the traditional concerns regarding the detrimental effects of high corporate rates would become obsolete. He articulates this view by stating:
"Given the relationship between excessive rents—the supernormal returns of firms—to monopoly and pricing power, the corporate tax should be adjusted to collect some of these currently widespread rents. The adjustment should not impact permanent full expensing rules because they ensure normal corporate projects are effectively not taxed. For companies with profits higher than $10 billion where there is a high likelihood of monopolistic or cartel-like behavior, a progressive rate structure should tax their profits as high as 80 percent. Companies with profits lower than this should be subject to lower marginal rates, gradually decreasing with their profit level. . . . A corporate tax rate of 80% for global profits above $10 billion is hard to imagine in a globalized economy because corporations would move their profits or their headquarters. But in a deglobalizing economy, such a tax applied on a worldwide basis is more feasible, because it is harder to move without losing access to the US market."
This perspective explicitly links high rates to the capture of "economic rents" or "supernormal profits"—returns above the competitive rate of return, often attributed to market power, unique intellectual property, or network effects. The premise of a "deglobalizing economy" is critical to Avi-Yonah’s argument, suggesting that reduced international mobility of capital and businesses makes such a high tax rate more feasible without triggering widespread capital flight or corporate inversions.
The Economic Theory: User Cost of Capital and Full Expensing
Full expensing is widely recognized as one of the most pro-growth tax reforms available, precisely because it aims to reduce the sensitivity of investment decisions to the corporate tax rate. In the standard economic (Hall-Jorgenson) framework, investors undertake a project only when its expected pre-tax return exceeds a minimum threshold known as the user cost of capital. This user cost (c) is traditionally represented by the formula:
c = (r + δ) / (1 – τz)
In this equation, ‘r’ represents the required after-tax return on capital, ‘δ’ signifies economic depreciation, ‘τ’ is the corporate tax rate, and ‘z’ is the present value of cost-recovery deductions per dollar invested. When full expensing is implemented, ‘z’ is set to 1, meaning the entire investment cost is immediately deductible. Consequently, the formula simplifies to c = r + δ. Under this simplified framework, the corporate tax rate (τ) seemingly disappears from the equation, leading to the conclusion that taxes no longer distort investment decisions. This theoretical neutrality is a powerful argument for full expensing and forms the bedrock of Avi-Yonah’s proposal to decouple investment decisions from the tax rate.
The Counter-Argument: Why Rates Still Matter Beyond the Ideal Model
While the standard economic framework provides a valuable approximation for understanding the relationship between taxation and investment, it does not fully encapsulate the complexities of real-world tax systems and entrepreneurial behavior. Drawing the conclusion that full expensing permits arbitrarily high tax rates without significant economic consequences is a simplification that risks overlooking critical "departures" from this ideal model. For modest rate adjustments, the standard framework offers a reasonable guide; however, for a dramatic increase to 80 percent, these real-world nuances become too substantial to disregard.
One compelling example lies in innovation driven by the entry of new firms, often funded in part by founders who accept less than their market wage—their "implicit wages"—while nurturing their nascent businesses. The fundamental challenge here is the inability of entrepreneurs to deduct these unpaid efforts or implicit wages for business tax purposes. No tax system can perfectly account for and price this opportunity cost as a business deduction. This inherent limitation means that the tax rate will not entirely cancel out in the user cost calculation, even under a regime of full expensing.
To illustrate this using an extension of the user cost formula, consider an investment requiring one dollar of explicit capital spending (fully expensed) alongside a complementary input of the founder’s own effort, with an opportunity cost ‘ψ’ per dollar of capital, which receives no business cost recovery. This ‘ψ’ could represent the market income the entrepreneur foregoes, net of labor taxes. Comparing the required pre-tax return on this project at a high business rate (τ’) versus a low business rate (τ”) yields the following ratio:
c’ / c” = [(1 – τ’)ψ + (1 – τ’)(r + δ)] / [(1 – τ”)ψ + (1 – τ”)(r + δ)]
If we assume the founder’s opportunity cost of unexpensed effort (‘ψ’) is equal to half of the capital investment—a reasonable estimate given research suggesting "sweat equity" can roughly match fixed asset investment, further adjusted for an assumed 50 percent labor tax rate (as motivated by studies from Bhandari and McGrattan)—then the implications of Avi-Yonah’s proposal become stark. Raising the business rate from the current 21 percent (following the Tax Cuts and Jobs Act of 2017) to 80 percent would increase the required pre-tax return by approximately 114 percent. Moreover, the elasticity of the required return to the tax rate is non-linear. Raising the rate by 10 percentage points from 21 percent to 31 percent would increase the required return by about 6 percent. In contrast, raising the rate by the same 10 percentage points from 70 percent to 80 percent would increase the required return by a much larger 31 percent. This demonstrates that the economic cost of raising the corporate tax rate is modest when the rate is low but becomes exceedingly large when the rate is already high, even with full expensing.
More broadly, the effectiveness of full expensing in neutralizing the tax rate diminishes whenever investment cost offsets are not perfectly symmetric with the taxation of gains. The entrepreneur’s implicit wages represent a clear case where a significant portion of the investment cost is not deductible for business tax purposes. Furthermore, even deductible investments can face delays in their write-off if a business is in a loss position, as is common for many startups and innovative ventures in their early stages. If a business never turns a profit—a reality for a significant portion of venture-backed startups, with 55 percent of those funded between 1985 and 2009 terminating at a loss—the deduction may never be fully realized. Such asymmetries fundamentally reintroduce the tax rate into the user cost calculation.
Moreover, Avi-Yonah’s proposal for a progressive corporate tax rate structure, where companies with profits above $10 billion face an 80 percent rate while smaller firms face lower marginal rates, introduces another layer of complexity. Such a progressive structure can create intertemporal asymmetries over the life cycle of a firm. For instance, if early-stage investment costs are expensed and relieved at a lower rate (e.g., 21 percent) while later-stage profits are taxed at a much higher rate (e.g., 80 percent), this disparity would inevitably raise the user cost of capital. The exact magnitude of this effect would depend on the timing of profits and losses, the discount rate applied to future cash flows, and the ability of firms to defer tax deductions, such as by electing out of bonus depreciation—a choice that itself reintroduces the tax rate into the user cost calculation.
Implications of an 80 Percent Corporate Tax Rate: Broader Economic and Global Concerns
Even with an ideally reformed tax base, an 80 percent corporate tax rate carries profound implications that extend far beyond the user cost of capital model.
- Innovation and Entrepreneurship: Beyond implicit wages, the high rate could deter risk-taking and innovation. While full expensing aims to make "normal corporate projects" tax-neutral, the very high rate on "supernormal returns" could stifle the pursuit of ambitious, high-risk, high-reward projects that are crucial for economic dynamism. Many innovative ventures start with years of losses before achieving profitability, and the prospect of an 80 percent tax on eventual success could significantly reduce the incentive for such endeavors.
- International Competitiveness and Capital Flight: Despite the premise of a "deglobalizing economy," an 80 percent corporate tax rate would make the U.S. an extreme outlier globally. The current global average corporate tax rate stands around 23-24 percent, with many developed nations well below 30 percent. Even with a destination-based system, the sheer magnitude of an 80 percent rate could still incentivize capital flight, discourage foreign direct investment into the U.S., and prompt American multinationals to strategically divest or reorient their global operations to minimize exposure to such a high domestic rate, even if headquarters remain in the U.S.
- Impact on Shareholder Returns and Economic Growth: While Avi-Yonah targets "rents," a significant portion of corporate profits eventually flows to shareholders. An 80 percent tax would drastically reduce after-tax returns, potentially leading to lower valuations for U.S. companies and a reduced incentive for both domestic and international investors to allocate capital to the U.S. equity markets. This could depress overall economic growth and wealth creation.
- Administrative Burden and Compliance Costs: Implementing and enforcing a progressive corporate tax rate with an 80 percent top bracket, especially one contingent on global profits exceeding $10 billion, would create an immense administrative burden for both the Internal Revenue Service and multinational corporations. Defining and accurately measuring "supernormal returns" or "economic rents" is inherently complex and subjective, prone to extensive litigation and sophisticated tax avoidance strategies.
- Political and Social Acceptability: Such a radical tax reform would face formidable political opposition from business groups, investors, and potentially a significant portion of the public concerned about its economic ramifications. While it might appeal to segments advocating for greater wealth redistribution or targeting corporate power, the practical implementation and long-term consequences would be subject to intense scrutiny and debate.
Reactions and Feasibility
The proposition of an 80 percent corporate tax rate, even with comprehensive base reforms, would undoubtedly ignite fierce debate across the economic and political spectrum. Business advocacy groups, such as the U.S. Chamber of Commerce and the Business Roundtable, would almost certainly issue strong condemnations, citing concerns about competitiveness, investment, and job creation. They would likely argue that such a rate would cripple American businesses, drive innovation overseas, and ultimately harm workers and consumers through reduced economic activity.
Conversely, progressive think tanks, labor unions, and advocates for greater income equality might find aspects of Avi-Yonah’s proposal appealing, particularly the aim to capture "excessive rents" and ensure large corporations pay a higher share. They might frame it as a necessary step to address wealth concentration and ensure a fairer distribution of economic benefits. International bodies like the OECD and IMF would likely view such an extreme unilateral move with caution, potentially seeing it as a destabilizing factor in ongoing global efforts to harmonize corporate taxation and prevent a race to the bottom. The OECD’s Pillar Two initiative, which aims for a 15% global minimum tax, highlights the current international focus on ensuring a baseline level of taxation, rather than the extreme top-end proposed by Avi-Yonah.
From a political feasibility standpoint, implementing an 80 percent corporate tax rate would be extraordinarily challenging in the current U.S. political climate. Even with a unified government, the sheer scale of the change would likely prevent it from garnering sufficient bipartisan support. The 2017 Tax Cuts and Jobs Act, which lowered the corporate rate from 35 percent to 21 percent, underscores the prevailing sentiment among many policymakers to maintain a competitive tax environment.
Conclusion: A Fundamental Tension
While the intellectual current advocating for a reformed tax base—one that includes full expensing and measures against profit shifting—is well-founded and offers genuine improvements to the U.S. tax system, it is a significant leap to conclude that such reforms would eliminate the inherent trade-offs involved in adopting a high corporate income tax rate. Moving towards an ideal tax base would undoubtedly lower the economic cost of today’s corporate tax rate and would mitigate the negative effects of a modest rate increase. However, the theoretical and empirical evidence strongly suggests that even with a perfectly designed base, an 80 percent corporate tax rate would introduce severe economic consequences that transcend the simplified models.
The debate sparked by Avi-Yonah’s article highlights a fundamental tension in modern tax policy: how to capture a greater share of corporate profits, particularly those deemed "supernormal," without inadvertently harming the very engines of innovation, investment, and job creation. The pursuit of tax neutrality through base reform is a commendable goal, but the notion that it provides a blank check for arbitrarily high tax rates remains a highly contentious proposition, one that merits rigorous economic scrutiny and a deep understanding of real-world complexities.
