August 1986.

The current debate on tax reform has raised again the question of how the

corporate tax system should be altered. The cumulative effect of piece

meal changes to the tax system has been to produce major distortions in the

pattern of savings and investment and falling revenue in real terms. To

overcome these problems, reform, both in the US and UK, has focussed on

ways to tax the real economic income of companies. The main problems with

this approach are the difficulties of (a) indexing the tax treatment of

income from capital in a comprehensive manner and (b) defining economic

depreciation. This paper discusses and alternative way to obtain the

objective of fiscal neutrality without a significant erosion of the tax

base. The implications of such a cash flow corporate income tax for

financial and investment decisions are discussed both theoretically and in

terms of potential and administrative and practical problems of

implementation.

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