Ease corporate tax by hitting up shareholders
A higher tax on investors and a lower tax on corporations could keep more investments in the US.
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To avoid this, many economists have argued for a fully integrated system where corporate income is paid either entirely at the business level or fully by shareholders. In fact, the vast majority of U.S. firms already do this by organizing themselves as pass-through entities such as S corporations and partnerships. In this model, owners pay tax on their individual returns but their business is not taxed at all.Skip to next paragraph
Howard Gleckman is a resident fellow at The Urban-Brookings Tax Policy Center, the author of Caring for Our Parents, and former senior correspondent in the Washington bureau of Business Week. (http://taxvox.taxpolicycenter.org)
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Matters are much more complicated for other corporations, however. Some profits are double-taxed. But others are never taxed at the business level, largely thanks to the ability of multinationals to shift income to low-tax countries and deductible expenses to the U.S. Worse, in that environment, high corporate rates discourage investment in the U.S.
Similarly, foreign investors and tax-exempt shareholders (such as pensions) pay no tax on a big chunk of corporate profits. Another slug of capital gains goes untaxed because investors die and their unrealized gains pass tax-free to their heirs.
The challenge in this environment is to figure out how to reduce the corporate rate so it is competitive with the rest of the world, make sure that profits are somehow taxed, and not increase the deficit by tens of billions of dollars annually. The Congressional Budget Office figures that over the next decade corporations will pay about $400 billion-a-year in income taxes.
That brings us to the option of raising taxes on investors. Shifting some taxes on corporate profits from firms to shareholders has some obvious advantages. The biggest may be that it would reduce those disincentives for companies to invest at home. A tax on shareholders is based on where they live, rather than where their profits are earned. Thus, a lower corporate tax and a higher shareholder tax may, on balance, help keep investment in the U.S.
The TPC paper also figures it would be more progressive than the current regime. Since some share of corporate taxes is paid by workers (just how much is a matter of theological debate among economists), lowering the corporate rate would raise their after-tax earnings. At the same time, TPC figures 70 percent of the higher individual investment taxes would be paid by the top one percent of earners.
There are lots of issues to sort out with such a shift. But it is certainly worth considering.
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