Paul L. Caron
Dean





Thursday, January 23, 2025

Weisbach: Taxing Corporate Payouts

David A. Weisbach (Chicago; Google Scholar), Taxing Corporate Payouts

Corporate distributions total about $1.5 trillion per year, yet the system for taxing distributions is a mess. It favors buybacks over dividends, and therefore is a possible cause of the growth of buybacks in recent years. It is almost comically complex. And even with its fantastic level of complexity (or perhaps because of the complexity), it provides opportunities for egregious shelters. Congress has repeatedly attempted reforms to fix these problems, with at best mixed success and often outright failure. Numerous commentators have proposed reforms but all either fail to eliminate the tax differential between buybacks and dividends or require significant changes to the tax system that introduce other problems. A central question for the design of the corporate tax is why none of these reforms succeed, and whether there are better alternatives. We answer this question here. 

We show there is no tax system that does not favor either buybacks or dividends while also taxing shareholder capital gains on a realization basis (along with several other modest assumptions about current law). We call this result the distributions tax impossibility theorem. The distributions tax impossibility theorem points the way toward better systems for taxing corporate payouts. One promising approach is to repeal the classification rules and allow the form of a payout determine its tax treatment. A second approach, which is an extension of the form-governs approach, would treat all dividends as partial sales (similar to the system proposed by Ethan Yale in 2009). Both would be combined with reforms that reduce the benefit of deferring distributions. Both reforms make the system more neutral between buybacks and dividends, massively simplify the law, and reduce or largely eliminate sheltering opportunities.

Editor's Note:  If you would like to receive a daily email with links to tax posts on TaxProf Blog, email me here.

https://taxprof.typepad.com/taxprof_blog/2025/01/weisbach-taxing-corporate-payouts.html

Scholarship, Tax, Tax Daily, Tax Scholarship | Permalink