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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