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Tax Inertia: A General Framework with Specific Application to Contemporary Business Tax Reform

A surprising degree of bipartisan consensus has lately formed in the United States around two propositions of business tax reform: that something should be done about the “lockout” of U.S. multinationals’ foreign earnings; and that (for reasons that go beyond lockout) the corporate income tax rate should be reduced. Largely absent from the discussion is the possibility that reducing the corporate rate may exacerbate other forms of tax inertia that are apparently similar in both structure and significance to international lockout — such as the “lock-in” that is evidently important enough to be a mainstay justification for lower rates on capital gains, or the lock-in (or is it lockout?) that hampers reinvestment across the entity-type border separating the half of U.S. business that is incorporated from the half that is not. The question thus arises: is the current bipartite bipartisan consensus in disagreement with itself? The paper begins by arguing against several seemingly obvious resolutions, explaining, for example, why international lockout is less inter-national than it may appear. It then develops a framework that clarifies the often hidden structural relationships between various species of tax inertia, provides a principled means of comparing degrees of inertia, and emphasizes the endogeneity of tax structures. The paper applies this framework to systematically assesses the complex impact of reducing the corporate tax rate across a range of investment switching scenarios.A web appendix is available at: http://ssrn.com/abstract=2618209