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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, May 17, 2016

Senate Holds Hearing Today On Integrating The Corporate And Individual Tax Systems

Senate LogoThe Senate Finance Committee holds a hearing today on Integrating the Corporate and Individual Tax Systems: The Dividends Paid Deduction Considered:

  • Michael J. Graetz (Columbia)
  • Judy A. Miller (American Society of Pension Professionals & Actuaries)
  • Steven M. Rosenthal (Tax Policy Center)
  • Bret Wells (Houston)

In connection with the hearing:

Michael J. Graetz (Columbia) & Alvin C. Warren, Jr. (Harvard) have published Integration of Corporate and Shareholder Taxes, 69 Nat'l Tax J. ___ (2016):

Integration of the corporate and individual income taxes can be achieved by providing shareholders a credit for corporate taxes paid with respect to corporate earnings distributed as dividends. When such integration was previously considered in the U.S., proponents emphasized that it could reduce or eliminate many of the familiar distortions of a classical corporate income tax. Integration would also provide a framework for addressing current concerns for tax incentives for U.S. companies to shift income to foreign affiliates in lower-taxed countries or to expatriate in "inversion" transactions. A recent Congressional proposal for a corporate dividend deduction coupled with withholding on dividends could achieve equivalent results, while also reducing effective U.S. corporate tax rates.

Steven M. Rosenthal & Lydia S. Austin (Tax Policy Center) have published The Dwindling Taxable Share of U.S. Corporate Stock, 151 Tax Notes 923 (May 16, 2016):

In this report, Rosenthal and Austin demonstrate that the share of U.S. stocks held by taxable accounts has declined sharply over the last 50 years, and they urge lawmakers to carefully consider this shareholder base erosion when determining how best to tax corporate earnings.

Rosenthal

See also Tax Vox: Only About One-Quarter of Corporate Stock is Owned by Taxable Shareholders, by Steven M. Rosenthal.

Bret Wells (Houston) has published International Tax Reform By Means of Corporate Integration, 19 Fla. Tax Rev. ___ (2016):

This Article focuses on a single organizing question, namely how should a dividend paid deduction regime be designed so that it achieves acceptable international tax outcomes. By focusing on the international tax implications attendant with a dividend paid deduction regime, the author is not attempting to minimize the broader benefits of achieving shareholder-corporate integration. The dividend paid deduction proposal, as to distributed earnings, would equate the tax treatment of debt and equity, and in so doing it would reduce distortions that current law creates with respect to debt and equity in the corporate context. Furthermore, recent economic works suggest that the incidence of the corporate income tax burden is partially shifted to labor and away from shareholders whereas a properly designed integration proposal puts the incidence of business taxation squarely on shareholders. Furthermore, shareholder-corporate integration for C corporations harmonizes the divergent tax treatment that currently exists between C corporations and pass-through entities. Thus, a corporate integration proposal provides a broad spectrum of potential benefits, and so not surprisingly significant scholarship has been dedicated towards how to best achieve shareholder-corporate integration. But, in today’s era, the overwhelming tax policy problem that must be solved rests on finding a solution to the systemic international tax challenges that face the country, and so that is where this Article will focus.

In Part I, the Article sets forth three major systemic international tax policy challenges that plague the extant U.S. international tax regime. In Part II, this Article evaluates the dividend paid deduction proposal in light of these systemic policy challenges and then provides analysis for how a properly designed dividend paid deduction regime can solve each of the international tax challenges set forth in Part I. Finally, in Part III, this paper draws tentative conclusions about the way forward.

The Joint Committee on Taxation has released Overview Of Approaches To Corporate Integration (JCX-44-16):

This document ... provides a discussion of present law and data relating to corporate integration, and of certain approaches to corporate integration.

Citizens for Tax Justice has released Corporation Integration: A Solution in Search of a Problem:

Since the beginning of this year, Senate Finance Chairman Orrin Hatch has been working on a proposal to “integrate” corporate and shareholder level taxes into what he calls a single level of taxation. While Sen. Hatch has yet to release a specific proposal, the Senate Finance Committee is holding a hearing on May 17 that will examine the possibility of achieving corporate integration by allowing corporations to deduct the payment of dividends to shareholders and, thus, sharply reduce their corporate income taxes.

Here are three of the biggest problems with this idea:

First, allowing dividends to be deductible at the corporate level would not lead to a single level of taxation on corporate dividend distributions. Instead, it would make most profits distributed as dividends tax-exempt at any level. Second, there is ample justification for a separate entity-level tax on corporate income. Third, at a time in which the country faces a lack of adequate revenue for public investments, corporate integration would result in a massive revenue loss from one of the country’s most progressive revenue sources.

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