Tax Reform in the UK and US

Abstract

Capital tax reform Mervyn King The US proposals, Treasury I and Treasury II, for reforming the taxation of corporate income are similar to reforms enacted in the UK in 1984. Both seek to broaden the tax base, to reduce the striking disparities in the effective tax rate on different types of investment and different methods of finance, and to remove the most extreme investment subsidies such as accelerated depreciation offsets against corporate income tax. Effective tax rates depend on the type of investment project, the method of finance, and the rate of inflation. For the UK and the US, the paper presents estimates of the effective marginal tax rates before and after the reforms, and compares these with tax rates in Japan. The variation in effective marginal tax rates will indeed be dramatically reduced by the reforms, though the average tax rate on corporate income as a whole will increase. The UK and US reforms differ in one significant respect: whereas the US Treasury proposals take inflation indexation seriously, the UK reform of 1984 effectively abandons all elements of inflation indexation in the taxation of income from capital.