Leonard E. Burman (Tax Policy Center) presents Is U.S. Corporate Income Double-Taxed? (with Kimberly Clausing (Reed College)) at NYU today as part of its Tax Policy Colloquium Series hosted by Daniel Shaviro and Rosanne Altshuler:
Every public finance student learns that corporations are subject to two levels of taxation—at the company level through the corporate income tax and the individual level through taxation of dividends and capital gains. Though observers frequently lament this double taxation of equity-financed corporate investment, double taxation is not important per se; the issue is the overall level of tax. (Most investors would prefer two 10 percent taxes to a single 30 percent tax.) Still, the overall effective tax rate depends on both corporate and individual income taxes.
Most policy discussions take this “double” taxation as given, and reform proposals frequently reflect the notion that the corporate tax overburdens equity-financed investments. Indeed, this was a major part of the motivation for several proposals to cut corporate tax rates dramatically, including recent proposals offered by Republican presidential candidates in 2016 as well as House Speaker Paul Ryan. More scholarly proposals have also suggested cutting corporate tax rates to 15%, and moving more of the tax burden to the individual level; see, e.g., Altshuler and Grubert (2016) and Toder and Viard (2016).
Yet, despite the implicit assumptions of policymakers and public finance scholars, our estimates suggest that the double taxation of corporate income is not an issue for the vast majority of U.S. corporate stock. For example, Rosenthal and Austin (2016) estimate that the taxable share of U.S. corporate stock has fallen dramatically in recent decades, from more than 80% in 1965 to only 24% in 2015. During this period, holdings by tax-exempt retirement accounts and foreigners have increased relative to holdings by taxable individual accounts. Using an alternative methodology, we confirm that most U.S. stock is held in nontaxable accounts, although the alternative methodology suggests that the nontaxable share may be somewhat higher in some years, averaging 32% for the period 2004-2013. Data from the U.S. Treasury Sales of Capital Assets files also confirm the general magnitudes of holdings in individual taxable accounts that are implied by both of these estimates.
We discuss the causes of these dramatic changes in the taxable share of corporate stock. Several factors explain the shift, including changes in retirement finance, demographic changes, changes in the prevalence of pass-through business organizations, and the increased globalization of capital markets.
These findings are important for the development of sound corporate tax policy. Our findings suggest that the corporate tax represents the only level of domestic tax for most corporate capital. Moving the capital tax burden to the individual income tax would either cause a large revenue loss or require a reform of tax preferences that currently exempt much corporate equity from taxation under the individual income tax.
These findings also have implications for other important questions in public economics, including the measurement of the cost of capital, the importance of capital gains lock-in effects, the consequences of changes in dividend taxation, and the nature of clientele effects.
at NYU today as part of its Tax Policy Colloquium Series hosted by Daniel Shaviro and Rosanne Altshuler: