Tuesday, July 29, 2008
The slated expiration of the Bush Administration's tax cuts in 2010 highlights the instability of the current 15% rate on dividends and capital gains. Meanwhile, pressure has mounted to reduce U.S. corporate tax rates to improve competitiveness in an increasingly global economy. Much of the 1986 Act reform of the corporate tax -- base-broadening combined with lower rates -- has unraveled, leaving the U.S. with a high statutory corporate tax rate and narrow corporate tax base. Despite renewed interest in base-broadening and loophole-closing, the goal of corporate tax reform remains elusive. Thus far, proponents of corporate tax reform have largely sidestepped the controversial issue of whether the 2003 tax cuts on dividends and capital gains should be made permanent.
This Article proceeds in three parts. The first part discusses the long-term decline in the role of the corporate tax in raising federal revenues and enhancing progressivity. Part two discusses how the Administration's 2003 proposal to eliminate double-level corporate taxation morphed into an unstable legislative compromise based on tax rate parity for dividends and capital gains. Part three considers two contrasting alternative goals reflected in current proposals for reform of business taxation: reduced corporate tax rates and enhanced expensing of new investment. The Article concludes that 1986-style base-broadening and reduced rates would improve competitiveness and limit tax sheltering opportunities, although a political consensus for such reform will be hard to forge and additional sources of revenue may be required to finance significant rate reductions.