News Release

August 14, 2003

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Flawed Corporate Tax Code Behind Enron, Other Scandals
New study says switching to a cash-flow business tax would help the economy and end scandals

WASHINGTON -- The onslaught of corporate scandals that has wreaked havoc on employee pension plans and landed executives in court is a result of the corporate income tax code, according to a Cato Institute study released today. The solution, says the author, is to move from a corporate income tax to a cash-flow business tax that makes it more difficult for companies to create elaborate tax shelter schemes.

"Tax complexity is an enemy to productive business management and sound investment decisions," writes Cato Director of Fiscal Policy Chris Edwards in "Replacing the Scandal-Plagued Corporate Income Tax with a Cash-Flow Tax." After studying the government's Enron reports, Edwards concludes that a cash-flow tax would eliminate many of the complications that dominate the current corporate tax code.

With a simpler corporate tax process, there would be fewer incentives for executives to create complex transactions to avoid taxation.

Beyond suggesting the cash-flow tax, Edwards examines a complete repeal of the corporate tax. The U.S. economy continually suffers from numerous corporations moving overseas to jurisdictions that have lower taxes. This is a direct result of nearly all other countries lowering their corporate tax rate below that of the United States. A full repeal of the corporate tax would take that advantage away from foreign countries and encourage companies to stay in or relocate to the United States.

While the recent dividend and capital gains tax cut passed by Congress was a good start, much more needs to be done. The Bush tax cut did not solve the many complexities in the corporate income tax code that have led to the tax shelters of recent years.

"Today's combination of corporate management problems and rising global competitive pressures makes this an excellent time to fundamentally rethink U.S. business taxation," Edwards concludes.