Professor Charlotte Crane (Northwestern) presented Integrating a Fragmented Corporate Income Tax at BC Law School’s Tax Policy Workshop yesterday. Briefly, the paper is focused on recent proposals to integrate the corporate income tax, in particular, the yet-to-be-released Orrin Hatch proposal from the Senate Finance Committee. I’m no corporate tax expert, but the workshop afforded me the excuse to wade like a duckling through the recent literature…a nice break from other projects.
The corporate integration debate refers to the question of whether to eliminate the corporate double tax (i.e., the tax on both the corporation and its shareholders on the same underlying income) and replace it with a single layer of tax. Many have argued that this would reduce tax burdens, minimize economic distortions, and bring us closer to tax neutrality in investment decisions. Others have argued that corporate integration achieved through shifting the corporate tax to the shareholder level will enhance progressivity and fairness.
The integration debate has raged for decades, with important Treasury and ALI studies in 1992 and 1993, and a surge of recent academic and policy interest. There are various design possibilities, including: integration via a shareholder credit (a.k.a. imputation), integration via a dividend deduction paired with a shareholder withholding tax, integration via a shareholder dividend exclusion, flow-through taxation, and others. A couple of recent proposals: Toder and Viard have suggested eliminating the corporate tax and replacing it with taxation of shareholder dividends and gains at ordinary rates, with gains taxed on a mark-to-market (accrual) basis. And Gruber and Altshuler even more recently proposed pairing a lowered (15%) corporate tax rate with ordinary income taxation of shareholder dividends and capital gains (including an interest charge on deferred shareholder liabilities designed to minimize behavioral distortions).
The Hatch proposal is likely to feature a dividend paid deduction (DPD) that eliminates the corporate-level tax and results in a tax at only the shareholder level. The Hatch proposal has faced pushback from a number of sources, including Prof. Edward Kleinbard, who has argued that the proposal will allow multinationals to repatriate corporate earnings without a corporate level tax. See Kleinbard, The Trojan Horse of Corporate Integration, 152 Tax Notes 957 (Aug. 15, 2016). Other commentators are more sanguine about the effects of the DPD proposal in the context of international tax reform, assuming it’s designed properly. See Graetz & Warren, Integration of Corporate and Shareholder Taxes, Nat’l Tax J. (2016); Bret Wells, International Tax Reform by Means of Corporate Integration, Fla. Tax Rev. (forthcoming 2016).
Charlotte argues, correctly, I think, that corporate integration reform efforts can no longer be divorced from reforms efforts surrounding the offshore earnings of multinationals. The newer arguments in favor of corporate tax integration are grounded in concerns—both optical and substantive—surrounding repatriation of offshore earnings and cross-border tax competition, and they occur against a backdrop in which the entire capital formation world has changed, what with the advent of LLCs and the changing composition of shareholders of U.S. corporations. Thus, Charlotte argues that evaluation of the forthcoming Hatch proposal (as well as other proposals) should be done against fresh metrics; they should not be rejected simply because they fail to satisfy older policy concerns.
The workshop yielded a spirited discussion over the continuing importance of progressivity and equity in domestic corporate tax design, given the realities of international tax competition and capital lockout. This duckling’s tentative impressions are that (1) with respect to the Hatch DPD proposal, much of the devil will be in the details, and (2) an outright zero rate at the corporate level is likely to be neither optimal nor revenue sufficient. I’m also curious how the Hatch proposal will interact with recent and forthcoming initiatives to stem corporate inversions and with Treasury’s recently finalized debt-equity regulations. Both developments affect the elasticity of the corporate tax base, and thus the strength of competitiveness arguments in favor of integration.