The Treasury Department has issued a report on improving the competitiveness of the U.S. business tax system, offering three alternative approaches designed to cut the corporate tax rate in the U.S. compared to other industrialized countries.

The report points out that the U.S. had a lower corporate tax rate in the late 1980s than other countries in the Organization for Economic Cooperation and Development, but the U.S. now has the second highest statutory corporate tax rate among the OECD countries.

"To maintain the competitiveness of U.S. businesses and U.S. workers in a global economy, an examination of our business tax system in the context of the global marketplace is overdue," said Assistant Treasury Secretary Eric Solomon in a statement.

One of the approaches suggested by the report is to replace the business income tax system with a "business activity tax," or BAT. The BAT tax base would consist of gross receipts from sales of goods and services minus purchases of goods and services (including purchases of capital items) from other businesses. Wages and other forms of employee compensation (such as fringe benefits) would not be deductible. Individual-level taxes on dividends and capital gains would be retained. Interest income received by individuals would be taxed at the current 15 percent dividends and capital gains rates.

A second approach would try to broaden the business tax base by eliminating all special provisions and reducing the top business tax rate to 28 percent. Alternatively, acquisitions of new investment could be partially expensed, with 35 percent written off immediately. The Treasury Department said that more significant benefits might be achieved with an even lower business tax rate of 20 percent or expensing of 65 percent.

A third approach would address specific areas, such as taxes on capital gains and dividends, the tax bias favoring debt finance, taxation of international income, treatment of losses, and book-tax conformity.

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