Rethinking the Corporate Tax Base: Why Full Expensing Cannot Justify an 80 Percent Rate

Main Facts

A provocative upcoming paper in the Tax Law Review, titled “Taxation and Deglobalization” by prominent legal scholar Reuven Avi-Yonah, has ignited a fierce debate among economists and tax policy analysts. Avi-Yonah argues that if governments implement comprehensive structural reforms to the corporate tax base—specifically incorporating full expensing for capital investments and measures to curb international profit shifting—concerns regarding the dampening economic effects of high corporate income tax rates become largely obsolete.

By restructuring the system, Avi-Yonah contends that policymakers can safely pursue aggressive progressive corporate taxation, entertaining a top marginal tax rate as high as 80 percent on global profits exceeding $10 billion.

While Avi-Yonah’s proposal represents an extreme end of the spectrum, it builds upon a broader school of thought shared by several prominent scholars and analysts—including Kimberly Clausing, Jason Furman, Michael Linden, and Samantha Jacoby—who frequently advocate for broadening the tax base to finance higher rates. However, mainstream economists and public finance researchers warn that this line of thinking rests on a dangerous theoretical extrapolation. While base-broadening measures like full expensing are undeniably pro-growth, experts argue it is a severe mistake to assume they completely neutralize the economic trade-offs and distortions introduced by excessively high marginal tax rates.

Chronology of the Debate

The intellectual lineage of tying corporate tax rates directly to the structure of the tax base dates back decades, rooted in foundational public finance models such as the Hall-Jorgenson user cost of capital framework.

• The Historical Baseline: Traditional tax reform has long oscillated between lowering rates while broadening the base (exemplified by the landmark Tax Reform Act of 1986) versus utilizing targeted incentives. Over the last ten years, however, progressive scholars have increasingly focused on globalization, multinational profit shifting, and monopoly rents ("supernormal returns") as justifications for higher corporate tax burdens.
• The Rise of Deglobalization Theories: In recent years, scholars like Reuven Avi-Yonah have updated these arguments for an era characterized by rising protectionism and "deglobalization." The core premise posits that as global supply chains fragment and nations erect trade barriers, multinational corporations lose some of their mobility, making it harder for them to flee high-tax jurisdictions without sacrificing vital market access—such as entry into the United States.
• The Current Proposal: Avi-Yonah’s forthcoming Tax Law Review article crystallizes this trend by proposing a progressive rate structure culminating in an 80 percent corporate tax rate for mega-corporations with profits over $10 billion. This has forced economists back to the drawing board, prompting immediate counter-analyses from research institutions and scholars like Kyle Pomerleau, who argue that such rate hikes remain fundamentally destructive regardless of base definitions.

Supporting Data and Economic Mechanics

To evaluate Avi-Yonah’s hypothesis, one must examine the mechanics of full expensing and the standard economic frameworks governing investment decisions.

The Promise and Limits of Full Expensing

Full expensing allows businesses to immediately deduct the full cost of capital investments in the year they are made. In the standard Hall-Jorgenson framework, the user cost of capital ($c$) is determined by the required after-tax return ($r$), economic depreciation ($delta$), the tax rate ($tau$), and the present value of cost-recovery deductions per dollar invested ($z$):

$$c = fracr + delta1 – tau (1 – tau z)$$

Under true full expensing, the present value of deductions equals one ($z = 1$). When substituted into the equation, the tax rate term ($tau$) cancels out entirely, yielding:

$$c = r + delta$$

Under this classical formulation, investment decisions are theoretically insulated from the corporate tax rate because normal returns are effectively untaxed. This mathematical elegance is what leads theorists to believe that high tax rates lose their distortionary bite once full expensing is secured.

Real-World Departures from the Model

However, the standard framework fails to capture the messy realities of actual business creation and operation. Several crucial factors disrupt this theoretical neatness:

1. Unpaid Entrepreneurial Effort ("Implicit Wages"): Many startups and innovative firms are launched by founders who accept below-market wages (sweat equity) while building the enterprise. Because these implicit wages cannot be cleanly deducted as business expenses, a portion of the investment cost remains unrecovered.
2. Asymmetric Tax Treatment of Gains and Losses: Tax systems rarely offer symmetric payouts for losses. Startups frequently face years of losses before turning a profit—if they survive at all. Historical data shows that a vast majority of venture-backed startups are terminated at a loss. If a business fails or cannot immediately utilize its deductions, the value of expensing is heavily eroded.
3. The Danger of Progressive and Disparate Rates: Avi-Yonah’s proposal introduces a progressive rate structure based on corporate profit thresholds. This creates severe intertemporal asymmetries over a firm’s life cycle. For instance, if early-stage development costs are written off against a low rate or deferred, while mature profits are taxed at an exorbitant 80 percent, the user cost of capital spikes dramatically.

Quantitative Impact of Rate Hikes

Mathematical extensions incorporating founder sweat equity and labor taxes demonstrate that the marginal cost of raising tax rates behaves non-linearly. Estimates suggest that raising the corporate rate from 21 percent to 31 percent increases a project’s required pre-tax return by a modest 6 percent.

In stark contrast, raising the rate by the same 10 percentage points from 70 percent to 80 percent increases the required pre-tax return by roughly 31 percent. Moving from 21 percent to 80 percent overall increases the required return by an astonishing 114 percent. This proves that while base-broadening mitigates economic damage at lower thresholds, the penalty for extreme rates remains crushing.

Official Responses and Perspectives

The academic community remains sharply divided over the feasibility and wisdom of pairing pristine tax bases with punitive rate structures.

• Proponents of Base Reform: Scholars aligned with progressive economic institutes—such as Kimberly Clausing, Jason Furman, Michael Linden, and Samantha Jacoby—maintain that fixing corporate loopholes, eliminating unwarranted deductions, and shifting toward destination-based cash flow taxes (DBCFT) can unlock substantial public revenues. They argue that cracking down on profit-shifting mechanisms—where multinational firms artificially move earnings to tax havens—demands a robust defensive posture from the state.
• Skeptics and Free-Market Analysts: Conversely, institutions like the Tax Foundation and scholars like Kyle Pomerleau push back strongly against the notion that high rates are benign. Critics emphasize that even under optimal base designs, an 80 percent tax rate invites massive regulatory evasion, reduces the incentive for dynamic risk-taking, and penalizes successful entrepreneurship. They warn that admiring the pro-growth properties of expensing should not blind policymakers to the undeniable economic drag associated with confiscatory marginal tax rates.

Implications for Future Tax Policy

The debate sparked by Avi-Yonah’s article carries profound implications for the future of global and domestic tax architecture. As nations grapple with fiscal deficits, deglobalization trends, and the rise of digital monopolies, policymakers are increasingly tempted to view the corporate tax code as a tool for wealth redistribution rather than capital formation.

1. The Appeal of Destination-Based Cash Flow Taxation: Movement toward a DBCFT—featuring border adjustments that deny import deductions while exempting export income—continues to attract attention because it effectively shuts down traditional profit-shifting avenues. These reforms genuinely improve the resilience of the tax base.
2. The Danger of Overreach: The central warning emerging from this scholarship is that structural fixes are not a silver bullet. While reforming the tax base can successfully lower the economic cost of a moderate, competitive corporate rate, treating it as a blank check for confiscatory taxation risks crushing domestic innovation.
3. Global Competitiveness: Even in a deglobalizing economy where market access gives nation-states greater leverage over corporations, capital remains remarkably adaptable. Excessive taxation on extraordinary returns risks driving venture capital underground, stifling research and development, and ultimately depressing long-term wage growth for workers.

Ultimately, while aligning the tax base with economic reality remains a noble and pro-growth objective, policymakers must recognize that marginal tax rates always matter—and pushing them toward the heights imagined by progressive theorists would carry severe consequences for economic vitality.