The corporate income tax system has been a focus of many recent debates about tax reform and the economy. Many economists and policy makers argue that reform of the corporate income tax system is needed, although a variety of rationales on why and how have been offered. Some argue that a simpler system with lower tax rates is necessary to encourage domestic investment, employment, and economic growth. Others argue that reform is needed to close loopholes and restrict access to tax havens, both of which are seen by some to allow corporations to avoid taxes too easily. A number of others have advocated for corporate tax reform on the basis that the current system puts American corporations at a disadvantage when compared with foreign competitors. Many believe it is a combination of these arguments that justify reforming the corporate tax system. This report presents information and research on the corporate tax to help policy makers understand and evaluate arguments presented in the tax reform debate. Many of the topics and ideas discussed here are analyzed in greater detail in the other CRS reports and academic research referenced throughout. This report first reviews the structure of the corporate income tax. Data on which companies pay the corporate tax, corporate tax revenue, and how the U.S. system compares to the rest of the world are then presented and analyzed. Next, the economic effects of the corporate tax are reviewed—including a discussion of the purpose of the corporate tax, who bears the burden of the tax, and how to evaluate alternative corporate tax systems. The report then reviews broad reform options and concludes with a comparison of specific proposals that have been offered. The corporate income tax generally only applies to C corporations (also known as regular corporations). These corporations—named for Subchapter C of the Internal Revenue Code (IRC), which details their tax treatment—are generally treated as taxable entities separate from their shareholders. That is, corporate income is taxed once at the corporate level according to the corporate income tax system. When corporate dividend payments are made or capital gains are realized income is taxed again at the individual-shareholder level according to the individual tax system. This treatment leads to the so-called "double taxation" of corporate profits. In contrast, non-corporate businesses, including S corporations and partnerships, pass their income through to owners who pay taxes. Collectively, these non-corporate business entities are referred to as pass-throughs. For these types of entities, business income is taxed only once, at individual income tax rates. The corporate income tax is designed as a tax on corporate profits (also known as net income). Broadly defined, corporate profit is total income minus the cost associated with generating that income. Business expenses that may be deducted from income include employee compensation; the decline in value of machines, equipment, and structures (i.e., deprecation); general supplies and materials; advertising; and interest payments. The corporate income tax also allows for a number of other special deductions, credits, and tax preferences. Oftentimes, these provisions are intended to promote particular policy goals, as deductions reduce taxes paid by corporations. A corporation's tax liability can be calculated as: Taxes = [(Total Income – Expenses)(1 – p ) × t ] – Tax Credits, where t is the statutory tax rate and p is the Section 199 production activities deduction. The Section 199 deduction, which is discussed in " Corporate Tax Expenditures " section, effectively lowers the corporate tax rate for those corporations engaged in domestic manufacturing activities. The corporate tax system becomes increasingly complex as the details of specific provisions are examined. The following sections discuss some of the more fundamental features of the tax system. Most corporate income is subject to a 35% statutory tax rate. To generate this flat rate, which applies to the largest businesses, income is taxed at rates that vary from 15% on the first $50,000 of income to 35% on income over $18,333,333. This rate structure benefits smaller corporations, encouraging some small firms to incorporate to take advantage of scenarios where paying corporate taxes is less costly than paying according to the individual tax system. The corporate tax rate increases above 35% for two income brackets. Corporations with taxable income between $100,000 and $335,000 are subject to a 39% tax rate, and corporations with income between $15,000,000 and $18,333,333 are subject to a 38% tax rate. These "bubble" brackets increase the effective tax rate for higher-income corporations by offsetting any tax savings they would realize from having the first $75,000 in income taxed at lower rates. One of the main points of contention in the debate over the corporate tax is that the 35% tax rate is too high. This rate is the statutory federal tax rate, defined as the legally imposed rate on taxable income. But this rate alone does not determine how much corporations pay in taxes. Because of a number of business tax benefits (deductions, credits, exemptions, etc.) in the corporate tax system, the effective (or actual) tax rate paid by corporations is typically less than the statutory rate. These tax benefits, known as tax expenditures, are discussed in the next section. It is also important to understand that effective tax rates can vary substantially among U.S. corporations and across corporations in the same industry. For example, some corporations rely more on debt financing, which is treated more favorably than equity financing in the tax code. Those corporations that rely on tax-preferred financing reduce their effective tax rate relative to those who do not. Some corporations and industries rely more on certain physical assets that can be depreciated ("written-off") more quickly than investments made by companies in others industries, which again leads to differing effective tax rates. Other corporations and industries have more extensive overseas operations, which may affect their effective U.S. tax rate. The corporate tax system contains a variety of incentives designed to encourage certain types of behaviors and assist certain businesses. These incentives are formally known as corporate tax expenditures and include special credits, deductions, exemptions, exclusions, and tax rates that result in revenue loss for the federal government. Some of the largest corporate tax expenditures include the domestic production activities deduction (Section 199 deduction) and the deferral of income earned abroad. Tax expenditures are not exclusive to the corporate tax system. In fact, individual tax expenditures result in nearly eight times the revenue loss to the federal government (see Figure 1 ) relative to corporate tax expenditures. In 2014, the sum of all corporate tax expenditures was $154.4 billion. Table 1 provides a list of the five largest corporate tax expenditure provisions in 2014. The largest corporate tax expenditure in 2014 was the deferral of active income of controlled foreign corporations, with an estimated revenue loss of $83.4 billion. Other top-five corporate tax expenditure provisions include those related to domestic production activities (Section 199), the deferral of tax on gains from like-kind exchanges, interest on state and local government debt, and the deferral of tax on installment sales. Not shown in Table 1 are the combined capital cost recovery provisions known as "bonus" and "accelerated" depreciation for equipment. In previous years, the combined estimate for these provisions was one of the largest tax expenditures, resulting in an estimated $13.9 billion revenue loss for 2013, for example. For 2014, however, the expenditure estimate yielded a revenue gain of $23.7 billion. The discrepancy can be understood by considering the timing effect depreciation investment incentives have on tax revenue collections. Bonus depreciation, which had been available from 2007 through the end of 2013, allowed firms to take a larger (or "bonus") upfront deduction for certain investment property, but also lead them to take smaller depreciation deductions in later years. This resulted in revenue losses in the early years of the depreciation period, and revenue gains in the later years. The 2014 revenue estimate reflects the fact that bonus depreciation has expired, and that a significant amount of previously eligible equipment is in the later years of the depreciable schedule. Another important component of the corporate tax system is the treatment of losses. A corporation that loses money in a particular year experiences what is known as a net operating loss (NOL). No corporate tax is due when a company has a NOL because they do not have profits (e.g., total income less expenses is negative). In addition, a NOL can be "carried back" and deducted from up to two prior years' taxable income. The corporation is then eligible for a refund equal to the difference between previously paid taxes and taxes owed after deducting the current year's loss. If the loss is too large to be fully carried back, it may be "carried forward" for up to 20 years and used to reduce future tax liabilities. Allowing for the carryback of losses reduces the distorting effects of taxation on investment and, in turn, increases economic efficiency. The government, by allowing NOL carrybacks, effectively enters into a partnership with taxpayers, sharing both the return to investment (tax revenue) and the risk of investment (revenue loss). When corporations earn income, they pay taxes. However, when corporations have losses, past and future tax liabilities are reduced through loss carrybacks, reducing risk. The further back losses can be carried, the closer is the taxpayer-government partnership, and the less distorting taxation becomes on investment. Further gains in economic efficiency are possible if the government can spread risk better than can be done in private markets. Additionally, the ability to carry back losses helps to prevent two firms that earn the same amount over a given time period, but differ in the timing of when the income is earned, from paying different amounts in taxes. The taxation of American corporations with overseas operations is another important part of the corporate tax. The United States taxes American corporations on their worldwide income. This approach to taxation is referred to as a worldwide (or resident-based) tax system. In contrast, a territorial (or source-based) system would tax American corporations only on income earned within the physical borders of the United States. In reality, no country has a pure worldwide or a pure territorial tax system. Under current law, corporations are allowed a credit, known as the foreign tax credit, for taxes paid to other countries. The foreign tax credit may not reduce a corporation's tax liability below zero. Additionally, corporations are not required to pay U.S. tax on overseas income until income is repatriated to the United States. This ability to defer taxes is often known simply as "deferral." Deferral is not an option, however, with "Subpart F" income, which generally includes passive types of income such as interest, dividends, annuities, rents, and royalties. The after-tax profits of a corporation are typically subject to tax again when shareholders receive dividend distributions. Under current law, the tax rate on dividends is 0%, 15%, or 20% depending on a taxpayer's ordinary income tax bracket. Taxpayers with an ordinary income tax rate of 15% or less pay the 0% rate on dividends. Taxpayers in the 25%, 28%, 33%, and 35% tax brackets are subject to a 15% tax rate on dividends. The 20% top rate applies to taxpayers in the 39.6% income tax bracket (single filers with taxable income above $406,750; married filers with taxable income above $457,600). Shareholders must also pay taxes on any capital gains they realize from selling shares that have appreciated in value. The tax rate on the gain from investments held less than a year (short-term capital gains) is equal to the taxpayer's ordinary income tax rate. Gain from investments held longer than a year (long-term capital gains) is the same as for dividends—0%, 15%, or 20%—depending on the shareholder's ordinary income tax bracket. Dividend and capital gains income may also be subject to a net investment income tax. Since 2013, a 3.8% tax is imposed on the lesser of (1) net investment income; or (2) the excess of modified adjusted gross income (MAGI) above a threshold amount. This threshold amount is $250,000 for taxpayers filing a joint return, $200,000 for single filers, and $125,000 for married filers filing separately. Currently, about 6% of businesses are organized as C corporations, and thus subject to the corporate income tax. As Figure 2 shows, this change is a significant decrease from the 17% of businesses that choose the corporate form in 1980. Some of this shift can be explained by various legislative and regulatory changes over this time period that reduced the top individual tax rate below the top corporate tax rate (making it more attractive to be a pass-through), increases in the shareholder limit for S corporations, and the ability of LLCs to elect partnership tax status. The share of business income generated by C corporations has also changed over time. In 1980, for example, corporations were responsible for nearly 80% of total business income. Today, corporations generate less than half of total business income, with the remainder coming from pass-throughs. C corporations, however, still generate a disproportionate share of all business income. Although C corporations only account for 6% of all businesses, they generate a disproportionate share of business income. But just as the fraction of businesses choosing the corporate form has decreased over time, so too has the fraction of income they generate. When looking at an industry level breakdown of what types of firms pay the corporate tax, manufacturing ranks number one (see Figure 3 ). In 2008, manufacturing was responsible for about 32% of corporate taxes paid. The wholesale and retail trade industry was next, accounting for 17% of corporate taxes paid, followed by the finance and insurance industry, which paid 16% of corporate taxes. The share paid by all other industries then drops sharply—8% paid by holding companies and the information industry, 4% by mining firms, and then no industry type accounted for more than 3% of taxes paid. This distribution of taxes paid is partly explained by the fact that most corporate business activity is conducted by a rather small number of large firms. This distribution is evident from a comparison of the distribution of taxes paid to the distribution of corporations across industry (see Figure 3 ). For example, while manufacturing paid 32.3% of taxes, it only accounted for 6.1% of corporations. Similarly, the finance and insurance industry paid 16.0% of taxes, but contained 4.3% of all corporations. In total, the five industries that paid the most in taxes (80.9% combined) only accounted for 33% of corporations. Only the wholesale and retail trade industry paid taxes in proportion to their share of corporate firms. There is also substantial variation in taxes paid by corporations in different industries. One way to compare the tax burden across industries is to look at various measures of an effective tax rate. The ratio of taxes paid divided by profits is known simply as the "effective rate." The effective rate incorporates various tax benefits and subsidies that reduce the taxable income base relative to financial profits, and hence reduce the tax rate firms actually incur relative to the statutory rate. The "effective marginal tax rate" is the rate of taxation on a projected investment project: it is an estimate of how much the return on an investment will be paid in taxes. The effective marginal rate is arguably the most well suited measure for determining the effect of tax rates on investment decisions. Data compiled by Aswath Damodaran, professor of finance at New York University, have been used to look at effective tax rates for U.S. companies across industrial sectors. Damodaran's data set includes financial information from roughly 6,000 U.S. public companies. Effective tax rates are calculated as taxes paid divided by taxable income (in the basic calculations, companies reporting losses that pay no taxes are considered to have an effective tax rate of zero). Industries with low effective tax rates tend to be those that are more likely to make large investments or expenditures on research and development (activities that are rewarded in the tax code). Examples include the biotechnology and semiconductor industries. Industries that tend to have higher than average effective tax rates include retail, food services, and utilities. Research has also shown that, in recent years, effective tax rates reported to shareholders on earnings statements by the most profitable U.S. companies have declined. This decline has occurred despite the fact that the statutory corporate tax rate has remained constant at 35%. The decline in effective tax rates for large U.S. corporations over time can largely be explained by increased international activity, combined with lower foreign tax rates. Tax expenditures have played a limited role in this change. Economists oftentimes use an effective tax rate to evaluate how the tax system affects incentives for capital investment. The effective marginal tax rate, which measures the impact of the tax system on investment decisions, can be defined as , where is the real before-tax return on the marginal (or incremental) investment and is the real return paid to investors. Higher effective marginal tax rates indicate greater potential investment distortions. Negative effective tax rates indicate that the tax code is actually subsidizing investment to the point where taxpayers are willing to accept a before-tax rate of return that is less than the after-tax rate of return for an investment. There are a number of factors that contribute to differences in effective marginal tax rates. These factors include the form of business organization, financing method (e.g., debt versus equity), whether a particular industry is more capital intensive than others, inflation, etc. Tax expenditure provisions also contribute to variation in effective marginal tax rates. A 2005 Congressional Budget Office (CBO) study calculating effective marginal tax rates for different asset types in the corporate sector found an overall effective marginal tax rate of 26.3%. Gravelle (2011) also calculates effective tax rates by asset type, finding an average effective tax rate of 30%. Both the 2005 CBO study and Gravelle (2011) identified the computers and peripheral equipment, automobile equipment, and industrial and commercial building sectors as being highly taxed—facing effective marginal tax rates of 30% or above. Assets with the lowest effective marginal tax rates—less than 20% in both studies—were communications equipment, ships and boats, railroad equipment, mining structures, and petroleum and natural gas structures. Corporate tax revenues have been declining over the last six decades. The corporate tax reached its post-World War II era peak in 1952 at 5.9% of gross domestic product (GDP) (see Figure 4 ). In 2013, the corporate tax generated revenue equal to approximately 1.6% of GDP. The corporate tax has also decreased in significance relative to other revenue sources. At its post-WWII peak in 1952, the corporate tax generated 32.1% of all federal tax revenue. In that same year the individual tax accounted for 42.2% of federal revenue, and the payroll tax accounted for 9.7% of revenue. In 2013, the corporate tax accounted for 9.9% of federal tax revenue, whereas the individual and payroll taxes generated 47.4% and 34.2%, respectively, of federal revenue. There are several factors that help explain the declining significance of the corporate tax. First, the average effective corporate tax rate has decreased over time, mostly as a result of reductions in the statutory rate and changes affecting the tax treatment of investment and capital recovery (depreciation). Second, the increasing fraction of business activity that is being carried out by pass-throughs (particularly partnerships and S corporations) has led to an erosion of the corporate tax base. Third, corporate-sector profitability has fallen over time, leading to a further erosion of the corporate tax base. Declining corporate sector profitability may be a result of several factors, including a shift within the corporate sector from less volatile to more volatile industries, a shift in the age of corporations from older to younger, and shifting of profits out of the United States and into lower-tax countries. Comparisons between corporate tax rates in the United States and those found elsewhere in the world are made frequently. The focus among non-economists tends to be on comparing statutory rates. Economists, however, generally prefer to compare effective tax rates when making international comparisons. The reason for this is that every country has a different tax system, and the statutory tax rate is just one component of each system. For example, some countries may have higher or lower rates, allow for faster capital recovery (i.e., deprecation), or offer corporate tax credits not offered by other countries. Effective tax rates attempt to account for all the system differences and are more indicative of the tax burden in each country. When making comparisons between U.S. and worldwide tax rates it is also important to indicate whether tax rates are simple (unweighted) averages or whether they are adjusted (weighted) to account for the size of the economies being compared. If the U.S. tax rate is compared to world tax rates that do not account for the size of other economies, then a small economy, such as Iceland, can have the same effect on the average international rate as a large economy, such as Germany or Japan. It is therefore more appropriate to compare the U.S. tax rate to a weighted average of international tax rates. Typically, each country's tax rate is weighted by its gross domestic product (GDP) when computing the average. Table 2 compares the statutory tax rate, the weighted effective rate, and the weighted effective marginal rate in the United States to the rest of the Organization for Economic Co-operation and Development (OECD) countries. While the U.S. statutory tax rate is about 10 percentage points higher than the other OECD countries, the U.S. effective tax rate is about the same as effective rates found elsewhere. The OECD, however, excludes several large economies, in particular China and Brazil. Table 2 also shows that the tax rate most relevant for investment decisions—the weighted effective marginal rate—is also similar between the United States and the rest of the world. Corporate tax revenues in the United States are below the average of all OECD member countries. Figure 5 displays corporate tax revenues for OECD member countries as a percentage of GDP for 2011. The average OECD member collected corporate taxes equal to 3.0% of GDP compared to the United States, which collected revenues equal to about 2.3% of GDP. Corporate tax receipts in the United States have been below the OECD average since 1997, and before that they fluctuated closely around the OECD average. Aside from a few outliers, most OECD countries collect revenue within a couple percentage points of each other. There are a couple of reasons why the United States collects less in federal corporate tax revenue than other countries. For example, as Figure 4 shows, corporate tax revenues in the United States have generally declined since WWII. At the same time, corporate tax revenues in other OECD countries (particularly European countries) have remained relatively stable even in the face of declining tax rates. Some countries have adopted base-broadening policies to offset tax rate decreases, typically in the form of reduced investment credits, less generous loss offset rules, and limitations on interest deductibility and depreciation. Recent research also suggests that there has been a shift from the non-corporate to corporate sector in some countries, and that in other countries limited liability outside the corporate form is not available, making it more attractive to shift to a corporate form. Combined, these factors appear to explain why corporate tax rates have fallen elsewhere while revenues have held steady. A variety of reasons have been offered to justify the corporate tax since the enactment of the Corporate Tax Act of 1909 (P.L. 61-4). To avoid constitutionality issues, Congress structured the tax as an excise tax on the privilege of doing business in the corporate form (i.e., limited liability and access to capital markets). While the new corporate income tax was challenged by several corporations that claimed it to be unconstitutional, the Supreme Court accepted its rationale and ruled that the privilege of doing business in the corporate form could be measured by profits. The privileged-based rationale for the corporate tax is generally not accepted by economists today. Economists tend to view the risk-sharing from limited liability and pooling of resources as beneficial to the economy. The corporate tax system serves to ensure a comprehensive income tax system. Absent a corporate income tax, corporate earnings would not be taxed until they were paid out to individuals. Thus, corporations would have an incentive to avoid taxes by retaining earnings. Shareholders would avoid taxes so long as corporations did not pay out earnings. Further, shareholders would benefit when corporations retained earnings over long periods of time, as delaying payouts would reduce the present value of the tax burden (assuming no change in tax rates over time). Some economists also favor the corporate tax as a tax on profits, or economic rents. Economic rents are profit levels above the required rate of return for factors of production (e.g., labor, capital). If the corporate tax could be designed to tax only pure profits or economic rents, the corporate tax would not induce efficiency losses. Firms maximize profits by optimizing on output and price. Taxes on pure profits or economic rents do not distort a firm's choice of output, and thus do induce distortions or efficiency losses. In practice, since pure profits and economic rents are difficult to measure, taxes are levied on accounting profits as described above (see " Structure of the Corporate Income Tax "). Thus, the corporate tax as currently applied is not a tax on pure profits or economic rents. Consequently, the corporate tax in its current form does distort economic decision making, which can reduce overall economic output. An alternative to having a corporate tax would be to directly tax the factors of production that make up the corporation (i.e., labor and capital). This option would eliminate the corporate tax entirely, effectively taxing all corporations as pass-through entities. While this approach represents one way to address concerns of double taxation on corporate profits, it would leave open the possibility that corporations could be used to shelter income if unrealized capital gains remained untaxed. Since corporations are legal, not physical entities, corporations cannot actually bear the burden of taxes. Instead, the tax is passed along to individuals connected with corporations, including corporate owners (shareholders), workers, and customers. For example, the tax could be passed along to these individuals in the form of lower dividends or capital gains (corporate owners), reduced salaries and fringe benefits (employees), or higher prices (customers). Traditional analysis of the corporate tax, in a closed economy, indicates that it is corporate owners who bear the tax burden, and the owners of capital more generally in the long run. In contrast, a number of more recent theoretical studies find that labor can bear the majority of the tax burden, in an open economy. The theoretical findings, however, appear to rely critically on particular assumptions that drive the results. When these assumptions are relaxed the burden of the corporate tax is found to fall mostly on capital—in line with the traditional analysis. In recent years, a number of economists have taken a statistical (empirical) approach to determine the incidence of the corporate tax. While these studies tend to conclude that a substantial portion of the corporate tax burden falls on labor, methodological limitations lead these results to be questioned. Given the unreliability of recent empirical research, and the consistency of traditional theoretical models, some economists have been reluctant to move away from traditional incidence assumptions, where owners of capital are assumed to bear most of the burden of the corporate tax. Government agencies that analyze how the incidence of the corporate tax is distributed have recently changed incidence assumptions used in producing distribution tables. The Congressional Budget Office (CBO) now assumes that 75% of the burden of the corporate income tax falls to owners of capital, with the remaining 25% assigned to households in proportion to their labor income. Prior to this change, the entire burden of the corporate tax was assumed to be borne by owners of capital. Until 2008, the Department of the Treasury made a similar assumption. Recently, however, the Treasury changed their incidence assumption, such that 82% of the corporate income tax burden is allocated to owners of capital, and 18% to labor income. The recent change in corporate tax incidence assumptions has important implications for policy analysis. When it is assumed that the entire burden of the corporate tax is borne by capital, revenue-neutral changes in the tax burden do not change the distribution of the tax burden. This means that base-broadening, rate-reducing tax reforms would not change how the tax burden is allocated across households. For example, a corporate tax rate cut financed by decreased depreciation deductions would not change the distribution of the corporate tax. However, under the new methodology, where a portion of the corporate tax burden falls on labor, changes in tax rates and changes in deductions that are revenue-neutral may change how the tax burden is distributed. Rate cuts financed by reduced depreciation deduction allowances, for example, would tend to reduce the progressivity of the corporate tax system when part of the burden falls on labor, as assumed by the Treasury. Several metrics can be used to evaluate the corporate tax system. These metrics can also help policy makers evaluate proposed reforms to the current system. One metric, equity, evaluates how the corporate tax burden is distributed across individuals. Generally, it is believed that the corporate income tax contributes to the overall progressivity of the U.S. tax system. A second metric, efficiency, looks at potential distortions in economic activity that result from the corporate tax system or specific provisions within that system. The third metric discussed here is "competitiveness." Policy makers frequently note that the U.S. tax system should be competitive. This precise definition of this concept, however, is often unclear. Finally, an ideal tax system would be simple, such that both the costs imposed on taxpayers of complying with the tax system and administrative costs are minimized. Some economists believe that the corporate income tax contributes to the overall progressivity of the tax system. CBO periodically publishes statistics on the distribution of federal taxes and household income. Corporate income taxes are estimated to be highly progressive. The average corporate income tax rate paid by those in the top 1% of the income distribution is 6.9% (see Table 3 ). Those in the bottom quintile of the income distribution have an average tax rate of 0.7%. Further, in 2010, households in the top earnings quintile paid 78.8% of all corporate taxes (while earning 51.9% of pretax income). CBO estimates that households in the bottom quintile paid 1.7% of all corporate tax liabilities, while earning 5.1% of all pretax income. In allocating the burden of the corporate income tax across households, CBO assumed that 75% of the burden was borne by owners of capital, while the remaining 25% was allocated to labor income. Previous CBO studies evaluating the distribution of federal taxes allocated the entire economic burden of the corporate income tax to owners of capital. The Treasury recently has started distributing a portion of the corporate tax burden (18%) to labor income. The implications of this assumption are illustrated in Table 4 . Treasury estimates suggest that, in 2012, if the entire burden of the corporate income tax were allocated to capital, taxpayers in the highest quintile would bear 80.9%. If it is assumed that 18% of the corporate tax burden falls on labor income (as is assumed by the Treasury), that share falls to 76.0%. Alternatively, if half of the corporate tax income were assumed to be borne by labor income earners, the share of the corporate tax burden falling on the top income quintile would be 68.9%. Generally, the larger the share of the corporate tax burden that is assumed to fall on labor, the less progressive the corporate tax appears. Economic inefficiencies arise when taxes distort market choices. When businesses and individuals make choices that are motivated by taxes, economic resources may not be put to their most productive use. Corporate tax reforms and corporate tax systems designed to minimize economic distortions can help promote an efficient economy. Generally, tax systems that impose large tax rates on broad tax bases limit tax-induced distortions in economic activity. Broadly, the corporate tax system distorts the allocation of capital across economic sectors. The corporate tax may reduce economic efficiency to the extent that it causes a misallocation of capital between corporate and noncorporate business forms. Certain provisions in the tax code, which lead to different effective tax rates on different types of investments, can also distort the allocation of resources (see the effective tax rate discussion in the section " Which Companies Pay? " above). Some of the exemptions, credits, deductions, and other tax preferences in the U.S. tax system represent attempts to address instances where markets fail to maximize economic efficiency. Take, for example, tax incentives for research and development (R&D) related activities. R&D that leads to technological innovation is associated with positive externalities. That is, there are benefits to R&D that accrue to those not directly involved in or paying for the research itself. Economic theory suggests that activities that generate positive externalities tend to be underprovided by markets. Thus, providing a tax subsidy for R&D, thereby directing additional economic resources to R&D related activities, could lead to additional R&D and improve overall economic efficiency. Tax preferences that narrow the tax base may necessitate higher tax rates to raise sufficient federal revenues over time. The potential for economic distortions caused by higher marginal rates should be weighed against the potential efficiency gains associated with various tax preferences. Tax preferences or tax expenditures that narrow the tax base, that do not otherwise enhance economic efficiency, can ultimately reduce economic efficiency by requiring higher marginal rates over time. Features of the U.S. corporate tax system that contribute to varying tax burdens across different asset types include the design of accelerated depreciation rules and the Section 199 production activities deduction. Removing certain provisions, such as accelerated depreciation, in exchange for reduced tax rates, will not necessarily improve economic efficiency. Slowing depreciation, and making depreciation more neutral across different types of assets, could increase the cost of capital. Additionally, modifying depreciation to be more neutral across assets while reducing the corporate tax rate provides a windfall benefit to existing capital. The burden on new investments increases, but all capital benefits from reduced tax rates. The U.S. corporate tax system also contains a tax-induced bias towards debt financing, which raises economic efficiency concerns. The primary factor contributing to this bias is the fact that interest payments can be deducted from income, while dividend payments cannot. Rising levels of corporate debt, and the possible contribution of high debt levels to the recent global economic crisis, have increased policy makers' interest in evaluating the current tax treatment of debt. Empirical evidence does suggest that tax policy affects firms' debt choices. For example, a recent study summarizing the results of the literature found that a one percentage point increase in tax rates increased the debt-asset ratio between 0.17 and 0.28. Overall, the size of the distortion has been estimated to be less than 5% of corporate tax revenues. The differential treatment of domestic and foreign-source income by U.S. multinationals also raises concerns that business decisions of U.S. multinational corporations may be motivated by tax policy. If multinational corporations allocate resources differently than they would under a neutral tax policy, current tax policy creates economic inefficiencies. If, however, resource reallocation in response to tax rate differentials is limited (i.e., there is limited capital mobility), then efficiency losses may be small. Finally, the economic efficiency of the corporate tax depends on what is actually being taxed. If a corporate tax can be designed such that the tax is levied on only economic profits, the tax should not change firms' output decisions in the short run, and thus should have limited efficiency consequences. In practice, however, the corporate tax is not levied on pure economic profits. The opportunity cost of capital is included in the tax base. In this sense, the corporate tax acts as a tax on capital, and could discourage capital formation in the corporate sector. Policy makers often use "competitiveness" as a rationale for corporate tax reform. Economists, however, question whether "competitiveness" makes sense as a tax policy objective for a country. For economists, the typical objective is economic efficiency, or the optimal use of limited resources. From an economic perspective, growth is not a zero-sum game, or something for which countries compete. Enhanced economic well-being in one country generally does not reduce economic opportunities in other countries. In fact, if one country experiences economic growth, those benefits tend to spill over to that country's trading partners, as higher domestic incomes increase the demand for imported goods and services. Trade between nations can benefit all countries involved. Thus, while individual firms may compete, countries trade. Much of the confusion surrounding the concept of "competitiveness" as a tax policy objective stems from the fact that what it means for a country to be "competitive" is not clearly defined. Some economists, in an attempt to define "competitiveness," have noted that "competitive" policies are those that promote domestic business globally, while increasing the U.S. standards of living. Krugman (1994) argues that this and similar definitions are flawed, noting that "the growth rate of living standards essentially equals the rate of domestic productivity growth—not productivity relative to competitors." The direct policy objective of promoting domestic business globally is also not clear. Is the goal to have tax policies that encourage U.S. firms to invest abroad, to better compete in international markets? Or is the goal to prevent the movement of U.S. business operations overseas? These two are different policy objectives often promoted in the name of "competitiveness." Given the confusion surrounding "competitiveness" as a policy objective, keeping the focus on the economic objectives of neutrality and economic efficiency could prove useful in designing tax policy that maximizes output and well-being. Complexity in the tax code contributes to increased compliance costs, as complex tax systems require taxpayers to devote more time and economic resources to tax preparation. Tax code compliance creates inefficiencies to the extent that resources devoted to tax preparation are not available for other productive activities. Further, complex tax systems may put certain taxpayers at a disadvantage, as those with limited resources may not be able to claim all tax benefits to which they are legally entitled. Thus, complex tax systems may be viewed as unfair or inequitable. Tax code complexity also increases administrative and enforcement costs. Simplifying the current tax system could help reduce the tax gap. Corporate tax reform discussions have generally focused on reducing the top corporate tax rate and offsetting the revenue loss by increasing the amount of income subject to tax (i.e., broadening the tax base). If revenue neutrality is a goal then a reduction in the corporate tax rate is limited by how much the tax base can be expanded. The rate can be reduced further (to zero) or the base made less broad if revenue loss is not a concern. Revenue loss may not be an option given the government's current and future revenue needs. Some have suggested that cutting the corporate tax rate below its current top rate of 35% could increase revenue. A recent CRS report reviewed and critiqued the literature that purportedly supports this argument and found that the claims that behavioral responses could cause revenues to rise if rates were cut do not hold up on either a theoretical or an empirical basis. How much could the corporate tax rate be reduced while achieving revenue neutrality? The Joint Committee on Taxation (JCT) has estimated that relying solely on elimination of corporate tax expenditures, the rate could be reduced to 28%, although this proposal did not include the repeal of deferral. The JCT estimates are only revenue neutral through a 10-year budget window. Some provisions, such as treatment of depreciation, change the timing of revenue, but not the total amount. Thus, estimates that are revenue-neutral through the 10-year budget window may not be revenue neutral over other time frames. It is estimated that a long-run revenue neutral corporate tax rate of 29.4% is attainable when the JCT estimates are adjusted to account for this timing effect and deferral is included. The top corporate rate could be reduced further if other changes were made in addition to eliminating all corporate tax expenditures. For example, the deductibility of interest, which is not a tax expenditure, could be restricted or eliminated. Additional revenues could be raised through the individual income tax system to pay for a corporate rate reduction. Examples of such options include higher capital gains tax rates, accrual taxation of gains on corporate stock, and limits or modest taxes on retirement savings (which would benefit from corporate rate reductions), changes to tax preferences available to noncorporate businesses, and other reforms to business taxation. At the same time, if the corporate tax rate is reduced, and tax reforms to the noncorporate sector are enacted, some business activity may return to the corporate sector, naturally broadening the base. Other business tax reforms may include changes to the taxation of American multinationals operating overseas. If these reforms reduced profit shifting to low-tax countries, the domestic corporate tax base may expand. It is important to think about how to broaden the corporate tax base. Most of the largest corporate tax expenditures have an effect on marginal investment decisions. For example, expensing of research and experimental expenditures, accelerated depreciation, and the low-income housing tax credit, all increase the after-tax returns to investment. The Section 199 production activities deduction reduces marginal tax rates. Removing these types of expenditures could increase the effective tax rate on capital investment, which would likely reduce investment, and therefore output and short-run employment. There are a limited number of corporate tax expenditures that could be repealed without increasing marginal tax rates on investment. Thus, designing a revenue-neutral base-broadening corporate tax reform that does not increase marginal tax rates on investment leaves limited room for rate reduction. Revenue-neutral tax reform that eliminated corporate tax expenditures in exchange for a reduced corporate tax rate will likely increase the tax burden on some industries, while decreasing the burden on others. Sectors that rely heavily on the research credit, such as the computers and electronics industry, could see their tax burden increase if the research credit were repealed to pay for a corporate rate reduction. Sullivan (2011) analyzes a hypothetical revenue-neutral corporate tax reform that slows depreciation, repeals the Section 199 deduction, and repeals the research credit, in exchange for a corporate rate reduction to 30%. Industries that would see the largest decline in their effective tax rates in Sullivan's analysis include securities, insurance, credit intermediation, and retail trade. Industries that would see the largest increase in effective tax rates include the computers and electronics, transport equipment, and electrical products sectors. Generally, Sullivan's hypothetical revenue-neutral corporate tax reform would increase effective tax rates on the manufacturing sector. Corporate tax base broadening, depending on its design, could have unintended consequences for pass-through businesses. Pass-throughs would generally not benefit from a reduction in corporate tax rates, since their income is not subject to the corporate tax. Additionally, since not all "corporate" tax benefits are exclusively available to corporations, depending on how corporate tax benefits are scaled back to offset a rate reduction, pass-throughs could see their tax burden increase. Generally, business-related tax incentives are available to businesses that pay taxes through the individual and corporate income tax system. Subjecting corporate income to two levels of taxation introduces a number of economic distortions. The current tax treatment of corporate income leads to otherwise similar corporate and non-corporate business being taxed differently; it creates incentives for corporations to retain earnings rather than distribute them; and the ability of corporations to deduct interest but not dividends leads to a preference for debt over equity financing. The distortions created by the corporate tax could be reduced by combining, or integrating, the corporate and individual tax systems. There are a number of ways and degrees to which integration could be pursued, and the list of options presented here is not exhaustive. Any reform that involved even partial integration of the corporate and individual tax systems would require careful consideration of numerous administrative details. Because of this, the discussion that follows focuses on general integration options. A much more detailed and technical analysis of various integration options may be found in a 1992 Treasury report on the subject. Another consideration is the potential revenue implications of an integration-based reform. Generally, integration of the corporate and individual tax systems would be expected to reduce federal revenues. If a goal of tax reform is revenue neutrality, additional revenue-raising options would need to be considered. One integration approach would be to eliminate the corporate tax and allocate earnings directly to shareholders in a manner similar to which partnerships and S corporations allocate income to their partners and shareholders. In effect, C corporations, partnerships, and S corporations would be treated identically for tax purposes, with all being treated as pass-throughs. The types of administrative issues that this approach raises include what corporate tax items are to be passed-through to shareholders; how will record keeping be handled (millions of shares are traded daily); what anti-abuse measures are needed to prevent the use of corporations as tax shelters? Inability to address these administrative challenges would likely make integration infeasible. An approach related to shareholder allocation is one that would keep the corporate tax in place, but give shareholders a credit for corporate taxes paid. The corporate tax in this case would act as a withholding tax, which would likely address some of the tax sheltering concerns that arise with direct allocations to shareholders. Additionally, keeping the corporate tax in place may ease certain administrative burdens should policy makers decide some tax items should not pass-through to shareholders. Concerns surrounding the administrative complexity associated with a full integration approach of this type have led the Treasury's not recommending this approach in their 1992 report. Allowing corporations to claim a deduction for dividends paid could reduce the "double taxation" of corporate income. This approach, however, would not fully eliminate the double taxation of corporate profits. A dividend deduction does not affect the taxation of capital gains. A dividend deduction would also make it more attractive for firms to distribute rather than retain earnings, thus reversing the current incentives for distributing or retaining earnings. Rather than providing a deduction at the corporate level, double taxation could be reduced by eliminating taxes for shareholders on dividends and capital gains, or just dividends. If dividends and capital gains were both excluded from income, the double taxation of corporate income would effectively be eliminated. Excluding just dividends would achieve partial relief. Eliminating taxation of corporate income at the individual level would reduce progressivity in the tax system, since dividend and capital gains income is disproportionately earned by higher-income households. Additionally, allowing firms a deduction for dividends paid or reducing individual-level taxes on capital gains and dividends would reduce federal tax revenues. One goal of some corporate tax reform proposals, and integration specifically, is to reduce the discrepancy in the taxation of corporate and non-corporate businesses. An option that would be consistent with this goal would be to subject certain pass-throughs to the corporate tax. Several policy makers and the Obama Administration have expressed interest in taxing the largest pass-throughs as corporations. This interest appears to be rooted in concern over the reduction in corporate tax revenues over time, partly attributable to the shift in business activity away from the corporate sector, and the perceived inequity and inefficiencies that exist because two otherwise identical businesses are taxed differently simply because of their legal structure. Taxing large pass-throughs as corporations would also allow for lower tax rates as it would broaden the corporate tax base. Lower tax rates combined with a reduction in business tax disparity could improve business tax equity and the allocation of resources relative to current policy. Depending on how "large" pass-throughs were identified, a relatively small percentage of businesses currently structured as pass-throughs could be affected by the corporate tax under certain reforms. An estimated 0.3% of S corporations could be taxed as corporations if a "large" pass-through is defined as one with receipts exceeding $50 million (0.2% for partnerships). Reducing this threshold to $10 million, an estimated 1.6% of S corporations could be taxed as corporations (0.8% for partnerships). Although estimates suggest that only a small percentage of pass-throughs could be considered large for corporate tax purposes, those firms are responsible for a significant amount of economic activity—indicating that the proposed policy change could raise substantial revenue. For example, 30% of S corporation receipts are generated by the largest 0.3% of S corporations, and 41% of partnership receipts are generated by the largest 0.2% of partnerships. Tax reform has raised an important question for policy makers with regards to American multi-nationals: is the current U.S. tax system for taxing American businesses with overseas operations appropriate in a globalized business environment, or is reform needed? While the current U.S. system is occasionally referred to as a worldwide tax system, in reality it is actually a hybrid, containing features of both worldwide and territorial tax systems. In fact, no country has a pure form of either tax system, although most developed countries have moved more in the direction of a territorial tax regime. The traditional metric used to evaluate an international tax system is how it affects investment location decisions. Economic theory states that worldwide output would be maximized if investments were taxed the same regardless of where they were made. In such an environment, taxes have no impact on where firms choose to invest. Instead, investments would be made in whichever location offered the highest rate of return, which, in turn, would result in resources being allocated most efficiently and output being maximized. Equalization of tax treatment across locations is most closely associated with a worldwide tax system. The current system U.S. tax system could be moved more in that direction if deferral of foreign earned income were not allowed and if the foreign tax credit limit were increased. While there have been proposals to limit the ability to defer income, worldwide-related proposals tend to move in the opposite direction with respect to the foreign tax credit, generally to prevent income shifting and to preserve the tax base (see the section " Comparing Current Corporate and Business Tax Reform Proposals "). Alternatively, a reform could be adopted that includes a transition to a territorial type system. Under a pure territorial system, the United States would forgo all income earned outside its borders. A territorial system is argued to help domestic corporations compete in foreign markets since they would face the same (foreign) tax rates as their competitors. But as was discussed previously (see the section titled " Competitiveness ") countries do not "compete" in any economic sense, they trade, and it is trade that helps determine the economic well-being of a country. Additionally, a territorial tax system does not necessarily enhance economic efficiency. At the same time, a territorial system may lead to more investment in low-tax countries. Proponents have argued that a territorial system would lead to an increase in corporate repatriations (transfers in foreign subsidiary profits to U.S. parent companies), which would promote domestic investment and employment. A popular technique that has been proposed to transition to a territorial system is by providing a dividend exemption. With a dividend exemption, corporations would be allowed to repatriate income from their foreign-located subsidiaries via a divided payment and exempt, for example, 95% of that payment from taxation. Research has questioned the effect of dividend repatriation exemptions on domestic investment and employment. Another option would take a hybrid approach, with the goal of minimizing incentives to shelter money in tax havens. The opportunity to keep money abroad for real business operations would remain. One proposal would impose a minimum tax on foreign-earned income earned in countries with low tax rates. The tax would be applied to deferred income earned in countries with a tax below a particular rate, for example, 20%. Income earned in countries with rates below 20%, thereafter, would be subject to a current U.S. tax of 20%. The income earned in countries with rates above this level would be exempt from U.S. taxation. Some have expressed concern that designing such a minimum tax may be too complex. An alternative to this approach that creates a "cliff" effect by encouraging firms to move investment to countries with tax rates just above the minimum is to impose an overall minimum tax with a credit for taxes paid. In recent years, economists, lawmakers, and others have offered a number of business and corporate tax reform proposals. Table 5 summarizes key comprehensive reforms proposed by Members of Congress and the Obama Administration. Also included in Table 5 are the business and corporate tax reforms from the 2010 Fiscal Commission report. In 2013, Senate Committee Finance Chairman Max Baucus released several tax reform discussion drafts. The draft on international tax reform proposes taxing passive and highly mobile forms of foreign-earned income, as well as income earned from goods ultimately consumed in the United States, at the full U.S. rate. Two alternatives were put forth for taxing income earned from products and services sold abroad. "Option Y" would subject all foreign-earned income to a minimum tax, which the draft sets at 80% of the U.S. statutory rate. "Option Z" would tax 60% of foreign active business income at the U.S. rate. Similar to the Camp proposal (discussed below), undistributed foreign earnings would be subject to a one-time tax. The Baucus discussion draft sets this rate at 20%. In other discussion drafts, Senator Baucus proposed reforms to cost recovery and accounting rules. Specifically, proposed reforms would eliminate the modified accelerated cost recovery system (MACRS), enacting instead a system that uses asset pools and longer lives that more closely approximate economic depreciation. Certain intangibles, including research and experimentation as well as advertising expenditures, would be capitalized and amortized. Last-in, first-out (LIFO) inventory accounting rules would be repealed. Small-business expensing allowances would be increased such that more businesses would be allowed to use cash accounting. Chairman Baucus has also released discussion drafts related to tax administration and energy tax policy. The former includes a number of proposals designed to reduce the tax gap, enacting additional data reporting requirements and anti-fraud provisions. The energy tax reform proposes to eliminate most existing energy-related tax incentives, creating new "technology neutral" production and investment tax credits. House Ways and Means Committee Chairman Dave Camp has also released several tax reform discussion drafts. The first, released in October 2011, addressed international tax issues. While the discussion draft did include text that would reduce the corporate tax rate to 25% (supporting documentation indicated that this rate reduction would be paid for with unspecified base-broadening provisions), the focus of the discussion draft was on provisions that would shift the United States to a territorial tax system. To shift towards a territorial tax, Chairman Camp's proposal would exempt 95% of certain foreign-source income from U.S. tax—including U.S. dividends paid to corporate shareholders owning at least 10% of shares. Thus, generally, income earned abroad would not be subject to U.S. tax. The proposal also suggests options for certain provisions designed to prevent erosion of the corporate tax base, including use of Subpart F rules for certain passive and highly mobile income and thin capitalization rules to prevent interest deductions for borrowing in the United States that would finance overseas operations. Chairman Camp has also released discussion drafts related to the tax treatment of financial products and small businesses. The primary change proposed in the financial products discussion drafts relates to the tax treatment of financial derivatives. Derivatives would be marked-to-market at year-end, such that taxpayers would recognize income or losses. Transactions treated as hedges for accounting purposes would also be treated as hedges for tax purposes so that businesses using derivatives to hedge business risk would not be required to mark-to-market. The draft also proposes to repeal rules that allow securities dealers to pay capital gains taxes on 60% of their derivatives income. The small business discussion draft provides two different reform options. Option one would revise existing rules related to pass-through entities, encouraging more C corporations to be taxed as S corporations, and address partnership tax avoidance. Option two represents a broader reform option, drafting a new set of rules for taxation of non-publicly traded businesses. Other proposals in the small business discussion draft would increase expensing allowances and allow larger-sized firms to use cash accounting. In February 2012, the Obama Administration released "The President's Framework for Business Tax Reform." The Administration's proposal would eliminate a number of corporate tax expenditures, and provides options for other corporate reforms. The Administration claims that eliminating tax expenditures, while adopting other base-broadening reforms, could result in a revenue-neutral reduction in the corporate tax rate to 28%. The Administration's proposal would also provide enhanced tax incentives for manufacturers, small businesses, research activities, and clean energy. The Administration's proposal also seeks to make changes to the current international tax system. Specifically, subsidiaries of U.S. corporations operating abroad would be required to pay a minimum tax on foreign-source income. The Administration's proposal would also deny certain deductions associated with moving business operations abroad, provide tax credits for expenses associated with moving business activities back to the United States, and strengthen international tax rules that may allow firms to shift profits overseas or reduce U.S. taxes by taking deductions associated with overseas investment. The Bipartisan Tax Fairness and Simplification Act of 2011 ( S. 727 ), often referred to as the "Wyden-Coats proposal," proposes substantial changes to the U.S. corporate tax system. The Wyden-Coats proposal would enact a flat corporate tax rate of 24%, while also enhancing expensing allowances for small businesses. The legislation proposes repealing a number of corporate tax expenditures, including the Section 199 production activities deduction, certain incentives for oil and gas, certain inventory accounting methods, and depreciation of equipment in excess of the alternative depreciation system, among others. The Wyden-Coats bill also proposes a number of changes to the U.S. international tax system. Specifically, this legislation would increase taxation of foreign source income—eliminating both deferral of active foreign earnings while enacting per country foreign tax credit limits. Thus, the Wyden-Coats bill would move the United States' international tax system more in the direction of a worldwide system. In December 2010, the National Commission of Fiscal Responsibility and Reform (also known as the Fiscal Commission or Simpson-Bowles) released a report outlining a plan for achieving long-run fiscal sustainability. Tax reform was one part of this comprehensive proposal. This Fiscal Commission's illustrative plan recommended reducing the corporate tax rate to 28%, eliminating corporate tax expenditures, including the Section 199 production activities deduction. The plan also proposed moving to a territorial tax system, continuing to tax passive foreign source income under Subpart F. Details on the specific structure of this territorial tax system were not provided. There are some areas of general consensus with respect to goal of corporate tax reform. Each of the four corporate tax reform proposals summarized in Table 5 would reduce statutory corporate tax rates (currently at 35%). Part of the revenue cost of rate reduction would be offset by eliminating corporate tax expenditures (which corporate tax expenditures should be eliminated is not an area of broad agreement). There is also general agreement that changes should be made to the current treatment of foreign-source income. There is not, however, a consensus on how a reformed corporate tax system should treat foreign-source income. One of the most fundamental differences in the corporate tax reform proposals surveyed in Table 5 is in the proposed treatment of foreign-source income. Some proposals would move towards a territorial tax system, effectively exempting income earned abroad from U.S. taxation. The Obama Administration's and the Wyden-Coats proposals both contain provisions that would strengthen the current worldwide system of foreign-source income taxation, reducing the ability for U.S. companies to avoid U.S. taxation through overseas operations.

Summary: Many economists and policy makers believe that the U.S. corporate tax system is in need of reform. There is, however, disagreement over why the corporate tax system needs to be reformed, and what specific policy measures should be included in a reform. To assist policy makers in designing and evaluating corporate tax proposals, this report (1) briefly reviews the current U.S. corporate tax system; (2) discusses economic factors that may be considered in the corporate tax reform debate; and (3) presents corporate tax reform policy options, including a brief discussion of current corporate tax reform proposals. The current U.S. corporate income tax system generally taxes corporate income at a rate of 35%. This tax is applied to income earned domestically and abroad, although taxes on certain income earned abroad can be deferred indefinitely if that income remains overseas. The U.S. corporate tax system also contains a number of deductions, exemptions, deferrals, and tax credits, often referred to as "tax expenditures." Collectively, these provisions reduce the effective tax rate paid by many U.S. corporations below the 35% statutory rate. In 2014, the sum of all corporate tax expenditures was $154.4 billion. The significance of the corporate tax as a federal revenue source has declined over time. At its post-WWII peak in 1952, the corporate tax generated 32.1% of all federal tax revenue. In 2013, the corporate tax accounted for 9.9% of federal tax revenue. The decline in corporate revenues is a combination of decreasing effective tax rates, an increasing fraction of business activity that is being carried out by pass-through entities (particularly partnerships and S corporations, which are not subject to the corporate tax), and a decline in corporate sector profitability. A particular aspect of the corporate tax system that receives substantial attention is the 35% statutory corporate tax rate. Although the United States has the world's highest statutory corporate tax rate, the U.S. effective corporate tax rate is similar to the Organization for Economic Co-operation and Development (OECD) average. Further, the United States collects less in corporate tax revenue relative to Gross Domestic Production (GDP) (2.3% in 2011) than the average of other OECD countries (3.0% in 2011). This report discusses a number of economic considerations that may be made while evaluating various corporate tax reform proposals. These might include analyses of the likely effect on households of certain reforms (also known as incidence analysis). Policy makers might also want to consider how certain corporate tax provisions contribute to the allocation of economic resources, choosing policies that promote an efficient use of resources. Other goals of corporate tax reform may include designing a system that is simple to comply with and administer, while also promoting competitiveness of U.S. corporations. Commonly discussed corporate tax reforms include policies that would broaden the tax base (i.e., eliminate tax expenditures) to finance reduced corporate tax rates. Concerns that the U.S. corporate tax system inefficiently imposes a "double tax" on corporate income have led some to consider an integration of the corporate and individual tax systems. The treatment of pass-through income—business income not earned by C corporations—has also received considerable attention in tax reform debates. How the United States taxes income earned abroad, and the possibility of moving to a territorial tax system, have emerged as important issues.