Hamilton: The Project: Advancing Opportunity, Prosperity and Growth

This paper was originally prepared for The Hamilton Project at The Brookings Institution.
Copyright © 2007 The Brookings Institution

The Hamilton Project seeks to advance America’s promise of opportunity, prosperity, and growth. The Project’s economic strategy reflects a judgment that long-term prosperity is best achieved by making economic growth broad-based, by enhancing individual economic security, and by embracing a role for effective government in making needed public investments. Our strategy—strikingly different from the theories driving economic policy in recent years—calls for fiscal discipline and for increased public investment in key growthenhancing areas. The Project will put forward innovative policy ideas from leading economic thinkers throughout the United States—ideas based on experience and evidence, not ideology and doctrine—to introduce new, sometimes controversial, policy options into the national debate with the goal of improving our country’s economic policy. The Project is named after Alexander Hamilton, the nation’s first treasury secretary, who laid the foundation for the modern American economy. Consistent with the guiding principles of the Project, Hamilton stood for sound fiscal policy, believed that broad-based opportunity for advancement would drive American economic growth, and recognized that "prudent aids and encouragements on the part of government" are necessary to enhance and guide market forces.

This discussion paper is a proposal from the author. As emphasized in The Hamilton Project’s original strategy paper, the Project is designed in part to provide a forum for leading thinkers from across the nation to put forward innovative and potentially important economic policy ideas that share the Project’s broad goals of promoting economic growth, broad-based participation in growth, and economic security. The authors are invited to express their own ideas in discussion papers, whether or not the Project’s staff or advisory council agree with the specific proposals. This discussion paper is offered in that spirit.

This paper introduces the Business Enterprise Income Tax (BEIT), a comprehensive and detailed proposal for reforming business income taxation. Current law fails to tax all business income consistently and comprehensively. It distorts economic behavior and diverts managerial effort toward tax avoidance.

In contrast, the BEIT achieves comprehensive and consistent taxation of capital income and reduces tax-planning incentives. The BEIT integrates taxes at the corporate and the individual levels, ensuring that all income is taxed once and only once. The BEIT eliminates current law distinctions between debt and equity. Instead, the BEIT uses its cost of capital allowance (COCA) system to tax investors on the normal (risk-free) return to capital and to tax businesses only on risky returns and rents. Under the COCA system, businesses obtain a uniform deduction for a normal return on their capital and pay tax on the rest of their income; investors include an assumed normal return in their taxable incomes, whether or not received by them in cash. (Investors also pay a small tax on gains beyond normal returns for practical and ability-to-pay reasons). In practice, the COCA system functions as a business-level consumption tax plus an add-on investor tax on normal returns.

The BEIT proposal also rationalizes the tax system by applying a single set of rules to all forms of business enterprises and business acquisitions. As a result, all business income is taxed identically and consistently, regardless of niceties of form.

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