Alan Viard

Resident Scholar

District Of Columbia

2 years ago
Alan Viard
Resident Scholar
Many thanks for your comment. Although there is no way to determine the precisely optimal tax rate, we believe that 15 percent strikes a reasonable balance between attracting investment to the United States while collecting some revenue from foreign investors. We would like to have a lower rate than other countries to affirmatively draw investment to the United States. The 15 percent rate also allows the plan to achieve revenue and distributional neutrality. The mechanism for changing the rate is set forth in the Constitution - Congress and the president can change it at any time through the legislative process. See more
Alan Viard
Resident Scholar
Many thanks for your comment. The 15 percent tax would offer the advantage of neutrality between debt and equity holdings by non-profits. We expect the total tax burden on nonprofits to be roughly unchanged from current law, under which they bear a 35 percent (indirect) tax on equity holdings and no tax on debt holdings. See more
Alan Viard
Resident Scholar
Many thanks for your question. As shown in Expected Result 4, tax treatment will be even between debt-financed and equity-financed investment by publicly traded businesses, but will not be completely even between publicly traded businesses and non-publicly-traded businesses. Complete parity cannot be achieved because it is impractical to tax accrued gains for owners of non-publicly-traded businesses, given that there is no accurate way to determine the value of their ownership interests each year. See more
Alan Viard
Resident Scholar
Many thanks for your comment. The relatively low corporate tax collection in the United States is longstanding and well known. In 2014, the United States collected 2.2 percent of GDP in corporate taxes, significantly below the 2.8 percent average for OECD countries - the data are in the OECD data file in the "Go Deeper" section (go to "Comparative Tables - OECD Countries" and choose "1200 Taxes on income, profits, and capital gains of corporates" in the Tax Revenue tab at the top of the page). Part of the reason that corporate tax revenue is so low in the United States (despite the high statutory tax rate) is that a large volume of U.S. business activity is done by non-corporate businesses. See more
Alan Viard
Resident Scholar
Many thanks for your suggestion. Your proposal, which is likely to have a number of advantages and disadvantages, lies outside the scope of our proposal. If it is judged to be desirable, it could be added to the corporate income tax after our proposal has been enacted, just as it could be added to the current corporate income tax. See more
Alan Viard
Resident Scholar
Thanks for your comment.

A rate reduction for typical shareholders' long-term gains would likely have no impact on the behavior of corporate management, as management would not adopt a longer-term perspective merely because rank-and-file shareholders had longer holding periods. Your comment recognizes that, however, by suggesting that the rate differential apply only to major shareholders and corporate insiders; it's possible that changing those groups' holding periods could change management behavior (although that's not entirely clear). However, it would be politically problematic to grant a lower long-term capital gains rate only to those groups. Also, it would be difficult to administer such a selective provision through the tax code.

Investors would not need to "reserve" money for possible tax payments. Investors holding publicly traded assets could sell those assets, if necessary, to pay tax on accrued gains. (With the averaging provision, such sales would be unnecessary in most cases). Investors holding non-publicly-traded assets would continue to be taxed on a realization basis.
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3 years ago
Alan Viard
Resident Scholar
Many thanks for your comment. We are considering modifying the proposal to keep a low-rate corporate income tax. That would be the most practical way to continue collecting some tax from foreigners investing in the United States. It would also make it feasible for states to continue using corporate income taxes.

The statement that "many" business tax breaks create equitable outcomes may be overstated, although a few of them may have that effect.

There is little room for concern on employee benefits and corporate charity. There are almost no business tax breaks for employee benefits; nearly all of them receive the same business tax treatment as wages. Instead, the tax preference for employee benefits is the exclusion of the benefits from the worker's taxable income; that preference would remain unchanged under the proposal. Today, corporate charitable contributions receive two tax breaks (unlike individual contributions, which receive only one). First, the corporation deducts the contribution. Then, the shareholders' taxes are reduced because the contribution lowers the shareholder's dividends or capital gains. Although our proposal would eliminate the first tax break, it would enlarge the second tax break by raising the dividend and capital gains tax rates.

The Low Income Housing Tax Credit is a potential concern, as we noted in our 2014 Major Surgery report. The New Markets Tax Credit may fall into the same category. The simplest solution may be to convert both credits into direct grants and place them on the spending side of the budget. In one key respect, the LIHTC and NMTC already resemble grant programs rather than tax breaks, as they are subject to nationwide dollar limitations and taxpayers wishing to claim them must compete for allocations from government agencies.

In any event, this issue would also go away if the proposal was modified to retain a low-rate corporate income tax, as the credits could then continue to be claimed against the corporate tax.
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Alan Viard
Resident Scholar
Many thanks for your comment. Subtracting the end-of-year value from the corresponding value a year ago is a simple exercise and mutual funds would compute the values for their holders. It is certainly vastly simpler than computing the appropriate cost amount to deduct from the sales proceeds under today's tax rules. Admittedly, the averaging system adds some additional computations, but they can be made relatively simple. No 10-year average stock price, or anything like it, would be used at any stage of the computations.

The concern about "playing" the market is exactly backward. There are plentiful opportunities to do that under today's rules, by selling some shares and not others. The whole point of taxing accrued gains is to prevent such games. If the shareholder's wealth has increased, she is taxed, regardless of what she does (sell, not sell, switch to other stocks, etc.).

The averaging system should largely address the concern about having to pay taxes before the profits are in hand. Moreover, many of the companies that are in the take-off phase are not publicly traded and therefore would not be subject to accrual taxation.
See more
Alan Viard
Resident Scholar
Many thanks for your comment. We are considering modifying the proposal to keep a low-rate corporate income tax. That would be the most practical way to continue collecting some tax from foreigners investing in the United States.

There is little room for concern about the specific tax preferences that you mention. There are almost no business tax breaks for the provision of employee benefits; nearly all of them receive the same business tax treatment as wages. Instead, the tax preference for employee benefits is the exclusion of the benefits from the worker's taxable income; that preference would remain unchanged under the proposal. Today, corporate charitable contributions receive two tax breaks (unlike individual contributions, which receive only one). First, the corporation deducts the contribution. Then, the shareholders' taxes are reduced because the contribution lowers the shareholder's dividends or capital gains. Although our proposal would eliminate the first tax break, it would enlarge the second tax break by raising the dividend and capital gains tax rates. Similarly, the deduction for domestic production activities artificially favors the production of goods over services and requires an array of complicated rules to distinguish the two. That deduction should be repealed, regardless of whether our proposal is adopted. Any tax preferences that serve valid goals, such as the Low Income Housing Tax Credit, could be converted into grant programs and thereby removed from the tax system.

Of course, if the proposal was modified to retain a low-rate corporate income tax, the problem would go away because tax preferences could continue to be claimed against the corporate tax.
See more
Alan Viard
Resident Scholar
Many thanks for your comment. We are considering modifying the proposal to maintain a low-rate corporate income tax. That would be the most practical way to collect some tax from foreigners investing in the United States and it would also help address the revenue gap.

It is possible that a few wealthy shareholders might give up their U.S. citizenship, but it's hard to imagine that very many would take such a drastic step. Despite all the media coverage, the number of citizenship renunciations is still quite low. Individual residence is vastly less mobile than corporate charters or the location of corporate profits. Indeed, if individual residence ever becomes too mobile to serve as a tax base, there won't be anything left to tax except land.
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Alan Viard
Resident Scholar
Many thanks for your comment. We do expect an inflow of capital and increased standard of living for workers.

The stock market should not be profoundly affected. Due to the changes in tax treatment, it is likely that somewhat fewer Americans, and somewhat more foreigners, will own stock in U.S. companies. The impact on stock prices is unclear, due to conflicting effects from the corporate tax repeal and the shareholder tax increases. As explained elsewhere, we do not expect any noticeable change in stock market volatility.
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Alan Viard
Resident Scholar
Many thanks for your comment. We do expect a large inflow of investment into the United States, which would be a great benefit to American workers.

It is not clear, however, that the investment inflow would result in a significant revenue feedback. To be sure, additional individual income taxes and payroll taxes would be collected on the higher wages produced by the investment inflow. However, the inflow would also drive down before-tax rates of return on capital, which would reduce individual income tax collections on capital income. And, there would be no corporate income tax revenue from the investment inflow because there would be no corporate income tax. We therefore need to look elsewhere to address our revenue gap.
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Alan Viard
Resident Scholar
Many thanks for your comment. It is possible that a few wealthy shareholders might give up their U.S. citizenship, but it's hard to imagine that very many would take such a drastic step. Despite all the media coverage, the number of citizenship renunciations is still quite low. Individual residence is vastly less mobile than corporate charters or the location of corporate profits. Indeed, if individual residence ever becomes too mobile to serve as a tax base, there won't be anything left to tax except land. See more
Alan Viard
Resident Scholar
Many thanks for your comment. I am not sure, though, why lower-income voters would resent shareholder taxes, but not corporate taxes. The proposal's ability to bring investment back to the United States and reverse outsourcing needs to be a key part of its messaging. We continue to welcome any suggestions on how to market the proposal. See more
Alan Viard
Resident Scholar
Many thanks for your comment. The proposal would likely reduce savings by Americans to a small extent, while attracting additional savings by foreigners to be invested in the United States.

We are considering modifying the proposal to keep a low-rate corporate income tax. That would be the most practical way to continue collecting some tax from foreigners investing in the United States.
See more
Alan Viard
Resident Scholar
Many thanks for your comment. The complete elimination of the corporate income tax does leave potential revenue on the table. We reached that point, however, because there is no practical way to tax foreign investors without maintaining a corporate income tax and we wanted the simplification and efficiency of completely eliminating the corporate income tax.

Nevertheless, we are now considering modifying the proposal to maintain a low-rate corporate income tax. Doing so would modestly diminish the efficiency and simplification gains, but would allow taxes to be collected from foreign investors.
See more
Alan Viard
Resident Scholar
Many thanks for your comment. The revenue estimate does not assume any changes in behavior by companies or individuals in response to the altered incentives created by the proposal.

Incorporating behavioral changes might not make that much difference. In particular, it is not clear that the investment inflow would result in a significant revenue feedback. To be sure, additional individual income taxes and payroll taxes would be collected on the higher wages produced by the investment inflow. However, the inflow would also drive down before-tax rates of return on capital, which would reduce individual income tax collections on capital income. And, there would be no corporate income tax revenue from the investment inflow or from the re-booking of profits into the United States because there would be no corporate income tax.
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Alan Viard
Resident Scholar
Many thanks for your comment. Although it is difficult to estimate the investment inflow, it would surely be quite large, given that the corporate rate is being reduced by 35 percentage points. Nevertheless, we still need to address the revenue loss. See more
Alan Viard
Resident Scholar
Many thanks for your comment. The long-term fiscal imbalance does make it all the more imperative that the revenue shortfall be addressed.

We are considering modifying the proposal to keep a low-rate corporate income tax. That would be the most practical way to continue collecting some tax from foreigners investing in the United States and it would address the revenue shortfall.
See more
Alan Viard
Resident Scholar
Many thanks for your comment. Corporate regulation by the SEC and other federal agencies would not be directly affected because that is done separately from the tax system.

Eliminating the corporate income tax would complicate congressional efforts to "regulate" corporate behavior through tax breaks. However, we view that effect as generally beneficial, with the proviso that a few tax breaks such as the research tax credit and the low-income housing tax credit may serve useful functions and may need to be preserved in some other form.
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Alan Viard
Resident Scholar
Many thanks for your comment. The capital inflow into the United States would strengthen the dollar.

It is likely that foreign governments would reduce their corporate tax rates to some extent, in an effort to maintain their competitive standing in world capital markets. (A number of other countries reduced their corporate tax rates after the United States reduced its rate in 1986). If they did that, less capital might flow to the United States than would have if other countries did nothing. Nevertheless, there would still be a significant net capital inflow to the United States. Other countries can't match a 35-percentage-point reduction in the corporate tax rate, particularly because they're starting from rates lower than 35 percent. And, we really shouldn't object to our allies and trading partners improving their tax systems and strengthening their economies.
See more
Alan Viard
Resident Scholar
Many thanks for your comment. We are considering modifying the proposal to keep a low-rate corporate income tax. That would address the revenue shortfall and would be the most practical way to continue collecting some tax from foreigners investing in the United States. See more
Alan Viard
Resident Scholar
Many thanks for your comment. We are considering modifying the proposal to keep a low-rate corporate income tax. That would address the revenue shortfall and would also be the most practical way to continue collecting some tax from foreigners investing in the United States. See more
Alan Viard
Resident Scholar
Many thanks for your comment.

Thanks for your discussion of the potential modification of keeping a low-rate corporate income tax with an offsetting credit for American shareholders. We continue to carefully consider that potential change to the proposal.
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Alan Viard
Resident Scholar
Many thanks for your comment. We are not inclined to adopt any special measures (either carrots or sticks) targeted specifically at companies that previously operated in the United States. Instead, we prefer to rely on the general incentive effects of the zero corporate tax rate. Even if companies that have moved abroad do not return, the zero corporate tax rate will deter other companies from leaving the United States and will encourage other companies throughout the world to consider coming to the United States. See more
Alan Viard
Resident Scholar
Many thanks for your comment. Your view about not taxing gains until they're turned into cash is widely held. However, the issue is a little more difficult.

Shareholders can obtain cash benefits from their gains even if they do not sell their appreciated shares as they can increase their consumer spending or borrow (or issue options) against the shares. Some prominent tax shelters have involved efforts to capture cash benefits from gains without selling assets.

Conversely, under today's tax rules, a mutual fund holder is taxed if the fund sells an appreciated stock, even if the holder has a preexisting arrangement to automatically reinvest capital gain distributions back into the fund and the fund uses the sale proceeds to buy another stock. Tax is imposed because the fund made a sale, even though the holder never saw any cash.

Trying to base tax treatment solely on whether cash has been received can become quite tricky. Because any appreciation is an increase in wealth, we prefer to tax it, with averaging provisions to smooth out the volatility.
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Alan Viard
Resident Scholar
Many thanks for your comment.

The proposal would reduce the current tax system's disincentives to operating as a C corporation rather than as a pass-through. In practice, there would still be some tax disincentive to being a C corporation because the taxation of accrued gains would likely be somewhat less favorable than the treatment of flow-through businesses.

Reducing the corporate tax rate from 35 percent to zero would have to make the United States a vastly more attractive investment location for both domestic and foreign companies.

The proposal's treatment of cross-border transactions, state and local governments, and other issues is discussed in our April 2014 Major Surgery report.

If accrued gains are taxed, accrued losses must be deducted. There would be no conceivable justification for the adoption of a "Heads the Government Wins, Tails the Taxpayer Loses" tax policy. Given the market's volatility, such a policy would place a heavy effective tax on stock investments and artificially punish risk-taking. If a share rose $20 one year and fell $20 the next year, returning to its original value, how could anyone justify taxing the $20 gain and ignoring the $20 loss? Neutral tax policy absolutely requires symmetrical treatment of gains and losses and we view that as a non-negotiable feature of the proposal.
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Alan Viard
Resident Scholar
Many thanks for your comment. We agree that the proposal is incomplete without provisions to offset the revenue loss.

We are considering modifying the proposal to keep a low-rate (perhaps 15 percent) corporate income tax. That would be the most practical way to continue collecting some tax from foreigners investing in the United States and it would address the revenue shortfall.
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Alan Viard
Resident Scholar
Many thanks for your comment. Under the proposal, Americans would have somewhat less incentive to save outside of tax-preferred accounts because the higher taxes on dividends and capital gains would offset the elimination of the corporate-level tax. As you point out, however, Americans would have a somewhat stronger incentive to save in tax-preferred accounts, including pensions and 401(k)s, as there would be no individual tax increases to offset the removal of the corporate tax. As discussed elsewhere on this site, however, we are considering modifying the proposal to impose a tax on tax-exempt shareholders, including tax-preferred accounts. If that change was made, the incentive to save in those accounts would be diminished. See more
Alan Viard
Resident Scholar
We envision adding an averaging provision that would allow large gains and losses to be smoothed across several years (see the discussion of that option below). With such a provision, most shareholders should be able to pay their tax liability from dividends or from their other income and assets, without having to sell shares.

In any event, there should be no increase in stock price volatility. If anything, the plan should reduce volatility. If shareholders sold shares to pay taxes after a pronounced market upturn, their sales would tend to drive the market back down; if shareholders bought shares with the tax savings they received after a pronounced market downturn, their purchases would tend to drive the market back up.

Nevertheless, we anticipate that the averaging provision will avoid any significant effect on stock price volatility, whether positive or negative.
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Alan Viard
Resident Scholar
Many thanks for your comment. Your view is widely held and is reflected in the design of the current tax system. Like most economists, however, Eric and I view accrued gains as real. Let me explain our perspective on this question.

It's important to understand that realization is a somewhat artificial concept. Even if they do not sell their appreciated shares, shareholders can "realize" the benefits of the appreciation by increasing their consumer spending or by borrowing (or issuing options) against the shares. Some prominent tax shelters have involved efforts to capture the economic benefits of gains without realizing them. As it becomes easier to manipulate the realization principle through sophisticated strategies, the tax system's reliance on that principle becomes more questionable.

The realization concept is particularly artificial as applied to mutual funds. Under today's rules, a mutual fund holder is not taxed if the fund's stock holdings appreciate and the fund does not sell them. But, the holder is taxed if the fund sells an appreciated stock, even if the holder has a preexisting arrangement to automatically reinvest capital gain distributions back into the fund and the fund uses the sale proceeds to buy another stock. Tax is imposed because the fund realized the gain. But, did the holder, who never saw any cash, actually "realize" anything?

The more one thinks about realization, the more questions arise about whether it's a sound basis for taxation.
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Alan Viard
Resident Scholar
Thanks, Lisa. We have decided to adopt an averaging provision. See more
Alan Viard
Resident Scholar
Elliott, many thanks for your question. Although Americans are subject to U.S. tax on their worldwide income, including overseas asset holdings, some wealthy Americans try to evade tax by holding assets overseas and hiding the holdings from the U.S. authorities. However, the Foreign Account Tax Compliance Act (FATCA), adopted in 2010 and now being implemented, includes powerful tools to impel foreign financial institutions to report Americans' asset holdings to the U.S. authorities.

Because our plan would increase individual-level taxes on stock holdings, it would, to some extent, increase the incentive to try to evade tax by holding foreign stocks and hiding the holdings from the U.S. authorities. Nevertheless, we believe that FATCA should be sufficient to curb such efforts. If not, FATCA could be strengthened.
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Alan Viard
Resident Scholar
Many thanks for your comment. We are seriously considering maintaining some tax on foreign investors.

One option would be to keep a low-rate corporate tax. If American shareholders were allowed to claim their share of the corporation's tax payment as a credit against their capital gains and dividend taxes, only foreign shareholders would bear a net burden from the tax.
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Alan Viard
Resident Scholar
Many, many, thanks for your comment. We do believe that our plan would strengthen the American economy and would benefit communities throughout the country. See more
Alan Viard
Resident Scholar
Many thanks for your comment. The corporate income tax is essentially a tax on job creation in the United States. Its elimination would dramatically reduce the cost of capital for manufacturing companies, and other companies, operating in the United States. See more
Alan Viard
Resident Scholar
The increased investment in the United States would make labor more productive, thereby boosting real wages over the medium to long term. The government would collect individual income and payroll taxes on the increased wages. However, the increased investment would also drive down the before-tax rate of return on investment in the United States, so there would be some reduction in the individual income taxes collected on capital income.

Although there could be a net positive revenue feedback, we are reluctant to rely on that possibility and are looking for ways to offset the plan's revenue loss.
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Alan Viard
Resident Scholar
Elliott, this is a good point.

It is likely that many foreign governments would reduce their corporate tax rates to some extent, in an effort to maintain their competitive standing in world capital markets. (A number of other countries reduced their corporate tax rates after the United States reduced its rate in 1986). If they did that, less capital might flow to the United States than would have if other countries did nothing.

Nevertheless, there would still be a significant net capital inflow to the United States. Other countries can't match a 35-percentage-point reduction in the corporate tax rate, particularly because they're starting from rates lower than 35 percent. And, we really shouldn't object to our allies and trading partners improving their tax systems and strengthening their economies.
See more
Alan Viard
Resident Scholar
Under the current tax system, corporations that earn profits in the United States pay U.S. corporate income tax. That tax falls on all of their shareholders, including foreigners. Because our proposal would abolish the corporate tax and replace it with taxes on American shareholders, it would eliminate U.S. taxes for foreign shareholders whose companies earn profits here. That tax-free treatment would be a powerful inducement for foreigners to invest in the United States, strengthening our economy. But, would that approach go too far? Should the proposal be changed to keep some kind of tax on those foreign investors? See more
Alan Viard
Resident Scholar
In reality, pension funds and other retirement accounts are not fully tax-exempt today because they indirectly pay corporate income tax on the stock that they hold. Eliminating that indirect corporate tax burden and directly imposing a flat tax on their investment income at an appropriate rate would not increase their tax burden, but would merely make it more transparent and more uniform.

Still, I understand the concern about taxing pension funds and other retirement accounts. An alternative possibility, which deserves consideration, would spare them from the tax and impose it only on non-profit organizations, such as university endowments.
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Alan Viard
Resident Scholar
You raise an important question about the burden of the corporate income tax. Part of the corporate income tax is probably borne by workers in the form of lower wages; repeal of the corporate income tax would correspondingly increase wages (over a period of time). Some leading estimates suggest that approximately 20 percent of the corporate income tax shows up in wages; other estimates suggest 40 percent or higher.

In contrast, a tax on shareholders is unlikely to change wages to any significant extent.

In order to avoid a tax increase on tax-exempt shareholders, therefore, we should calibrate the new tax on investment income to offset only the net benefits (accounting for the wage effects) that those shareholders receive from corporate tax repeal.

Please note that 15 percent is merely an illustrative number. We plan to do a more precise calculation in the upcoming months. We will carefully consider how to account for the wage effects.
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Alan Viard
Resident Scholar
Under our proposal, shareholders might pay tax on large accrued gains some years and might deduct large accrued losses in other years, as the stock market fluctuates. Some shareholders with large accrued gains might have to sell shares in order to pay the tax. To address these concerns, we suggest that shareholders be allowed to average their tax liabilities over several years and to defer their tax payments in some cases. What are the best ways to design the averaging and deferral provisions? Are such provisions necessary? Would they be adequate to address concerns about volatility and liquidity? See more

Alan hasn't commented yet.

2 years ago
Alan Viard
Resident Scholar
Many thanks for your comment. Although there is no way to determine the precisely optimal tax rate, we believe that 15 percent strikes a reasonable balance between attracting investment to the United States while collecting some revenue from foreign investors. We would like to have a lower rate than other countries to affirmatively draw investment to the United States. The 15 percent rate also allows the plan to achieve revenue and distributional neutrality. The mechanism for changing the rate is set forth in the Constitution - Congress and the president can change it at any time through the legislative process. See more
Alan Viard
Resident Scholar
Many thanks for your comment. The 15 percent tax would offer the advantage of neutrality between debt and equity holdings by non-profits. We expect the total tax burden on nonprofits to be roughly unchanged from current law, under which they bear a 35 percent (indirect) tax on equity holdings and no tax on debt holdings. See more
Alan Viard
Resident Scholar
Many thanks for your question. As shown in Expected Result 4, tax treatment will be even between debt-financed and equity-financed investment by publicly traded businesses, but will not be completely even between publicly traded businesses and non-publicly-traded businesses. Complete parity cannot be achieved because it is impractical to tax accrued gains for owners of non-publicly-traded businesses, given that there is no accurate way to determine the value of their ownership interests each year. See more
3 years ago
Alan Viard
Resident Scholar
Many thanks for your comment. We are considering modifying the proposal to keep a low-rate corporate income tax. That would be the most practical way to continue collecting some tax from foreigners investing in the United States. It would also make it feasible for states to continue using corporate income taxes.

The statement that "many" business tax breaks create equitable outcomes may be overstated, although a few of them may have that effect.

There is little room for concern on employee benefits and corporate charity. There are almost no business tax breaks for employee benefits; nearly all of them receive the same business tax treatment as wages. Instead, the tax preference for employee benefits is the exclusion of the benefits from the worker's taxable income; that preference would remain unchanged under the proposal. Today, corporate charitable contributions receive two tax breaks (unlike individual contributions, which receive only one). First, the corporation deducts the contribution. Then, the shareholders' taxes are reduced because the contribution lowers the shareholder's dividends or capital gains. Although our proposal would eliminate the first tax break, it would enlarge the second tax break by raising the dividend and capital gains tax rates.

The Low Income Housing Tax Credit is a potential concern, as we noted in our 2014 Major Surgery report. The New Markets Tax Credit may fall into the same category. The simplest solution may be to convert both credits into direct grants and place them on the spending side of the budget. In one key respect, the LIHTC and NMTC already resemble grant programs rather than tax breaks, as they are subject to nationwide dollar limitations and taxpayers wishing to claim them must compete for allocations from government agencies.

In any event, this issue would also go away if the proposal was modified to retain a low-rate corporate income tax, as the credits could then continue to be claimed against the corporate tax.
See more
Alan Viard
Resident Scholar
Many thanks for your comment. Subtracting the end-of-year value from the corresponding value a year ago is a simple exercise and mutual funds would compute the values for their holders. It is certainly vastly simpler than computing the appropriate cost amount to deduct from the sales proceeds under today's tax rules. Admittedly, the averaging system adds some additional computations, but they can be made relatively simple. No 10-year average stock price, or anything like it, would be used at any stage of the computations.

The concern about "playing" the market is exactly backward. There are plentiful opportunities to do that under today's rules, by selling some shares and not others. The whole point of taxing accrued gains is to prevent such games. If the shareholder's wealth has increased, she is taxed, regardless of what she does (sell, not sell, switch to other stocks, etc.).

The averaging system should largely address the concern about having to pay taxes before the profits are in hand. Moreover, many of the companies that are in the take-off phase are not publicly traded and therefore would not be subject to accrual taxation.
See more
Alan Viard
Resident Scholar
Many thanks for your comment. We are considering modifying the proposal to keep a low-rate corporate income tax. That would be the most practical way to continue collecting some tax from foreigners investing in the United States.

There is little room for concern about the specific tax preferences that you mention. There are almost no business tax breaks for the provision of employee benefits; nearly all of them receive the same business tax treatment as wages. Instead, the tax preference for employee benefits is the exclusion of the benefits from the worker's taxable income; that preference would remain unchanged under the proposal. Today, corporate charitable contributions receive two tax breaks (unlike individual contributions, which receive only one). First, the corporation deducts the contribution. Then, the shareholders' taxes are reduced because the contribution lowers the shareholder's dividends or capital gains. Although our proposal would eliminate the first tax break, it would enlarge the second tax break by raising the dividend and capital gains tax rates. Similarly, the deduction for domestic production activities artificially favors the production of goods over services and requires an array of complicated rules to distinguish the two. That deduction should be repealed, regardless of whether our proposal is adopted. Any tax preferences that serve valid goals, such as the Low Income Housing Tax Credit, could be converted into grant programs and thereby removed from the tax system.

Of course, if the proposal was modified to retain a low-rate corporate income tax, the problem would go away because tax preferences could continue to be claimed against the corporate tax.
See more
Alan Viard
Resident Scholar
Many thanks for your comment. We do expect an inflow of capital and increased standard of living for workers.

The stock market should not be profoundly affected. Due to the changes in tax treatment, it is likely that somewhat fewer Americans, and somewhat more foreigners, will own stock in U.S. companies. The impact on stock prices is unclear, due to conflicting effects from the corporate tax repeal and the shareholder tax increases. As explained elsewhere, we do not expect any noticeable change in stock market volatility.
See more
Alan Viard
Resident Scholar
Many thanks for your comment. We do expect a large inflow of investment into the United States, which would be a great benefit to American workers.

It is not clear, however, that the investment inflow would result in a significant revenue feedback. To be sure, additional individual income taxes and payroll taxes would be collected on the higher wages produced by the investment inflow. However, the inflow would also drive down before-tax rates of return on capital, which would reduce individual income tax collections on capital income. And, there would be no corporate income tax revenue from the investment inflow because there would be no corporate income tax. We therefore need to look elsewhere to address our revenue gap.
See more
Alan Viard
Resident Scholar
Many thanks for your comment. It is possible that a few wealthy shareholders might give up their U.S. citizenship, but it's hard to imagine that very many would take such a drastic step. Despite all the media coverage, the number of citizenship renunciations is still quite low. Individual residence is vastly less mobile than corporate charters or the location of corporate profits. Indeed, if individual residence ever becomes too mobile to serve as a tax base, there won't be anything left to tax except land. See more
Alan Viard
Resident Scholar
Many thanks for your comment. The proposal would likely reduce savings by Americans to a small extent, while attracting additional savings by foreigners to be invested in the United States.

We are considering modifying the proposal to keep a low-rate corporate income tax. That would be the most practical way to continue collecting some tax from foreigners investing in the United States.
See more
Alan Viard
Resident Scholar
Many thanks for your comment. The complete elimination of the corporate income tax does leave potential revenue on the table. We reached that point, however, because there is no practical way to tax foreign investors without maintaining a corporate income tax and we wanted the simplification and efficiency of completely eliminating the corporate income tax.

Nevertheless, we are now considering modifying the proposal to maintain a low-rate corporate income tax. Doing so would modestly diminish the efficiency and simplification gains, but would allow taxes to be collected from foreign investors.
See more
Alan Viard
Resident Scholar
Many thanks for your comment. The revenue estimate does not assume any changes in behavior by companies or individuals in response to the altered incentives created by the proposal.

Incorporating behavioral changes might not make that much difference. In particular, it is not clear that the investment inflow would result in a significant revenue feedback. To be sure, additional individual income taxes and payroll taxes would be collected on the higher wages produced by the investment inflow. However, the inflow would also drive down before-tax rates of return on capital, which would reduce individual income tax collections on capital income. And, there would be no corporate income tax revenue from the investment inflow or from the re-booking of profits into the United States because there would be no corporate income tax.
See more
Alan Viard
Resident Scholar
Many thanks for your comment. Although it is difficult to estimate the investment inflow, it would surely be quite large, given that the corporate rate is being reduced by 35 percentage points. Nevertheless, we still need to address the revenue loss. See more
Alan Viard
Resident Scholar
Many thanks for your comment. Corporate regulation by the SEC and other federal agencies would not be directly affected because that is done separately from the tax system.

Eliminating the corporate income tax would complicate congressional efforts to "regulate" corporate behavior through tax breaks. However, we view that effect as generally beneficial, with the proviso that a few tax breaks such as the research tax credit and the low-income housing tax credit may serve useful functions and may need to be preserved in some other form.
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Alan Viard
Resident Scholar
Many thanks for your comment. The capital inflow into the United States would strengthen the dollar.

It is likely that foreign governments would reduce their corporate tax rates to some extent, in an effort to maintain their competitive standing in world capital markets. (A number of other countries reduced their corporate tax rates after the United States reduced its rate in 1986). If they did that, less capital might flow to the United States than would have if other countries did nothing. Nevertheless, there would still be a significant net capital inflow to the United States. Other countries can't match a 35-percentage-point reduction in the corporate tax rate, particularly because they're starting from rates lower than 35 percent. And, we really shouldn't object to our allies and trading partners improving their tax systems and strengthening their economies.
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Alan Viard
Resident Scholar
Many thanks for your comment.

The proposal would reduce the current tax system's disincentives to operating as a C corporation rather than as a pass-through. In practice, there would still be some tax disincentive to being a C corporation because the taxation of accrued gains would likely be somewhat less favorable than the treatment of flow-through businesses.

Reducing the corporate tax rate from 35 percent to zero would have to make the United States a vastly more attractive investment location for both domestic and foreign companies.

The proposal's treatment of cross-border transactions, state and local governments, and other issues is discussed in our April 2014 Major Surgery report.

If accrued gains are taxed, accrued losses must be deducted. There would be no conceivable justification for the adoption of a "Heads the Government Wins, Tails the Taxpayer Loses" tax policy. Given the market's volatility, such a policy would place a heavy effective tax on stock investments and artificially punish risk-taking. If a share rose $20 one year and fell $20 the next year, returning to its original value, how could anyone justify taxing the $20 gain and ignoring the $20 loss? Neutral tax policy absolutely requires symmetrical treatment of gains and losses and we view that as a non-negotiable feature of the proposal.
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Alan Viard
Resident Scholar
Many thanks for your comment. Under the proposal, Americans would have somewhat less incentive to save outside of tax-preferred accounts because the higher taxes on dividends and capital gains would offset the elimination of the corporate-level tax. As you point out, however, Americans would have a somewhat stronger incentive to save in tax-preferred accounts, including pensions and 401(k)s, as there would be no individual tax increases to offset the removal of the corporate tax. As discussed elsewhere on this site, however, we are considering modifying the proposal to impose a tax on tax-exempt shareholders, including tax-preferred accounts. If that change was made, the incentive to save in those accounts would be diminished. See more
Alan Viard
Resident Scholar
We envision adding an averaging provision that would allow large gains and losses to be smoothed across several years (see the discussion of that option below). With such a provision, most shareholders should be able to pay their tax liability from dividends or from their other income and assets, without having to sell shares.

In any event, there should be no increase in stock price volatility. If anything, the plan should reduce volatility. If shareholders sold shares to pay taxes after a pronounced market upturn, their sales would tend to drive the market back down; if shareholders bought shares with the tax savings they received after a pronounced market downturn, their purchases would tend to drive the market back up.

Nevertheless, we anticipate that the averaging provision will avoid any significant effect on stock price volatility, whether positive or negative.
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Alan Viard
Resident Scholar
Many thanks for your comment. Your view is widely held and is reflected in the design of the current tax system. Like most economists, however, Eric and I view accrued gains as real. Let me explain our perspective on this question.

It's important to understand that realization is a somewhat artificial concept. Even if they do not sell their appreciated shares, shareholders can "realize" the benefits of the appreciation by increasing their consumer spending or by borrowing (or issuing options) against the shares. Some prominent tax shelters have involved efforts to capture the economic benefits of gains without realizing them. As it becomes easier to manipulate the realization principle through sophisticated strategies, the tax system's reliance on that principle becomes more questionable.

The realization concept is particularly artificial as applied to mutual funds. Under today's rules, a mutual fund holder is not taxed if the fund's stock holdings appreciate and the fund does not sell them. But, the holder is taxed if the fund sells an appreciated stock, even if the holder has a preexisting arrangement to automatically reinvest capital gain distributions back into the fund and the fund uses the sale proceeds to buy another stock. Tax is imposed because the fund realized the gain. But, did the holder, who never saw any cash, actually "realize" anything?

The more one thinks about realization, the more questions arise about whether it's a sound basis for taxation.
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Alan Viard
Resident Scholar
Thanks, Lisa. We have decided to adopt an averaging provision. See more
Alan Viard
Resident Scholar
Elliott, many thanks for your question. Although Americans are subject to U.S. tax on their worldwide income, including overseas asset holdings, some wealthy Americans try to evade tax by holding assets overseas and hiding the holdings from the U.S. authorities. However, the Foreign Account Tax Compliance Act (FATCA), adopted in 2010 and now being implemented, includes powerful tools to impel foreign financial institutions to report Americans' asset holdings to the U.S. authorities.

Because our plan would increase individual-level taxes on stock holdings, it would, to some extent, increase the incentive to try to evade tax by holding foreign stocks and hiding the holdings from the U.S. authorities. Nevertheless, we believe that FATCA should be sufficient to curb such efforts. If not, FATCA could be strengthened.
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Alan Viard
Resident Scholar
Many thanks for your comment. We are seriously considering maintaining some tax on foreign investors.

One option would be to keep a low-rate corporate tax. If American shareholders were allowed to claim their share of the corporation's tax payment as a credit against their capital gains and dividend taxes, only foreign shareholders would bear a net burden from the tax.
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Alan Viard
Resident Scholar
The increased investment in the United States would make labor more productive, thereby boosting real wages over the medium to long term. The government would collect individual income and payroll taxes on the increased wages. However, the increased investment would also drive down the before-tax rate of return on investment in the United States, so there would be some reduction in the individual income taxes collected on capital income.

Although there could be a net positive revenue feedback, we are reluctant to rely on that possibility and are looking for ways to offset the plan's revenue loss.
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Alan Viard
Resident Scholar
Elliott, this is a good point.

It is likely that many foreign governments would reduce their corporate tax rates to some extent, in an effort to maintain their competitive standing in world capital markets. (A number of other countries reduced their corporate tax rates after the United States reduced its rate in 1986). If they did that, less capital might flow to the United States than would have if other countries did nothing.

Nevertheless, there would still be a significant net capital inflow to the United States. Other countries can't match a 35-percentage-point reduction in the corporate tax rate, particularly because they're starting from rates lower than 35 percent. And, we really shouldn't object to our allies and trading partners improving their tax systems and strengthening their economies.
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Alan Viard
Resident Scholar
Under the current tax system, corporations that earn profits in the United States pay U.S. corporate income tax. That tax falls on all of their shareholders, including foreigners. Because our proposal would abolish the corporate tax and replace it with taxes on American shareholders, it would eliminate U.S. taxes for foreign shareholders whose companies earn profits here. That tax-free treatment would be a powerful inducement for foreigners to invest in the United States, strengthening our economy. But, would that approach go too far? Should the proposal be changed to keep some kind of tax on those foreign investors? See more
Alan Viard
Resident Scholar
In reality, pension funds and other retirement accounts are not fully tax-exempt today because they indirectly pay corporate income tax on the stock that they hold. Eliminating that indirect corporate tax burden and directly imposing a flat tax on their investment income at an appropriate rate would not increase their tax burden, but would merely make it more transparent and more uniform.

Still, I understand the concern about taxing pension funds and other retirement accounts. An alternative possibility, which deserves consideration, would spare them from the tax and impose it only on non-profit organizations, such as university endowments.
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Alan Viard
Resident Scholar
You raise an important question about the burden of the corporate income tax. Part of the corporate income tax is probably borne by workers in the form of lower wages; repeal of the corporate income tax would correspondingly increase wages (over a period of time). Some leading estimates suggest that approximately 20 percent of the corporate income tax shows up in wages; other estimates suggest 40 percent or higher.

In contrast, a tax on shareholders is unlikely to change wages to any significant extent.

In order to avoid a tax increase on tax-exempt shareholders, therefore, we should calibrate the new tax on investment income to offset only the net benefits (accounting for the wage effects) that those shareholders receive from corporate tax repeal.

Please note that 15 percent is merely an illustrative number. We plan to do a more precise calculation in the upcoming months. We will carefully consider how to account for the wage effects.
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Alan Viard
Resident Scholar
Under our proposal, shareholders might pay tax on large accrued gains some years and might deduct large accrued losses in other years, as the stock market fluctuates. Some shareholders with large accrued gains might have to sell shares in order to pay the tax. To address these concerns, we suggest that shareholders be allowed to average their tax liabilities over several years and to defer their tax payments in some cases. What are the best ways to design the averaging and deferral provisions? Are such provisions necessary? Would they be adequate to address concerns about volatility and liquidity? See more

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2 years ago
Alan Viard
Resident Scholar
Many thanks for your comment. The relatively low corporate tax collection in the United States is longstanding and well known. In 2014, the United States collected 2.2 percent of GDP in corporate taxes, significantly below the 2.8 percent average for OECD countries - the data are in the OECD data file in the "Go Deeper" section (go to "Comparative Tables - OECD Countries" and choose "1200 Taxes on income, profits, and capital gains of corporates" in the Tax Revenue tab at the top of the page). Part of the reason that corporate tax revenue is so low in the United States (despite the high statutory tax rate) is that a large volume of U.S. business activity is done by non-corporate businesses. See more
Alan Viard
Resident Scholar
Many thanks for your suggestion. Your proposal, which is likely to have a number of advantages and disadvantages, lies outside the scope of our proposal. If it is judged to be desirable, it could be added to the corporate income tax after our proposal has been enacted, just as it could be added to the current corporate income tax. See more
Alan Viard
Resident Scholar
Thanks for your comment.

A rate reduction for typical shareholders' long-term gains would likely have no impact on the behavior of corporate management, as management would not adopt a longer-term perspective merely because rank-and-file shareholders had longer holding periods. Your comment recognizes that, however, by suggesting that the rate differential apply only to major shareholders and corporate insiders; it's possible that changing those groups' holding periods could change management behavior (although that's not entirely clear). However, it would be politically problematic to grant a lower long-term capital gains rate only to those groups. Also, it would be difficult to administer such a selective provision through the tax code.

Investors would not need to "reserve" money for possible tax payments. Investors holding publicly traded assets could sell those assets, if necessary, to pay tax on accrued gains. (With the averaging provision, such sales would be unnecessary in most cases). Investors holding non-publicly-traded assets would continue to be taxed on a realization basis.
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3 years ago
Alan Viard
Resident Scholar
Many thanks for your comment. I am not sure, though, why lower-income voters would resent shareholder taxes, but not corporate taxes. The proposal's ability to bring investment back to the United States and reverse outsourcing needs to be a key part of its messaging. We continue to welcome any suggestions on how to market the proposal. See more
Alan Viard
Resident Scholar
Many thanks for your comment. The long-term fiscal imbalance does make it all the more imperative that the revenue shortfall be addressed.

We are considering modifying the proposal to keep a low-rate corporate income tax. That would be the most practical way to continue collecting some tax from foreigners investing in the United States and it would address the revenue shortfall.
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Alan Viard
Resident Scholar
Many thanks for your comment. We are considering modifying the proposal to keep a low-rate corporate income tax. That would address the revenue shortfall and would be the most practical way to continue collecting some tax from foreigners investing in the United States. See more
Alan Viard
Resident Scholar
Many thanks for your comment. We are considering modifying the proposal to keep a low-rate corporate income tax. That would address the revenue shortfall and would also be the most practical way to continue collecting some tax from foreigners investing in the United States. See more
Alan Viard
Resident Scholar
Many thanks for your comment.

Thanks for your discussion of the potential modification of keeping a low-rate corporate income tax with an offsetting credit for American shareholders. We continue to carefully consider that potential change to the proposal.
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Alan Viard
Resident Scholar
Many thanks for your comment. We are not inclined to adopt any special measures (either carrots or sticks) targeted specifically at companies that previously operated in the United States. Instead, we prefer to rely on the general incentive effects of the zero corporate tax rate. Even if companies that have moved abroad do not return, the zero corporate tax rate will deter other companies from leaving the United States and will encourage other companies throughout the world to consider coming to the United States. See more
Alan Viard
Resident Scholar
Many thanks for your comment. Your view about not taxing gains until they're turned into cash is widely held. However, the issue is a little more difficult.

Shareholders can obtain cash benefits from their gains even if they do not sell their appreciated shares as they can increase their consumer spending or borrow (or issue options) against the shares. Some prominent tax shelters have involved efforts to capture cash benefits from gains without selling assets.

Conversely, under today's tax rules, a mutual fund holder is taxed if the fund sells an appreciated stock, even if the holder has a preexisting arrangement to automatically reinvest capital gain distributions back into the fund and the fund uses the sale proceeds to buy another stock. Tax is imposed because the fund made a sale, even though the holder never saw any cash.

Trying to base tax treatment solely on whether cash has been received can become quite tricky. Because any appreciation is an increase in wealth, we prefer to tax it, with averaging provisions to smooth out the volatility.
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Alan Viard
Resident Scholar
Many thanks for your comment. We agree that the proposal is incomplete without provisions to offset the revenue loss.

We are considering modifying the proposal to keep a low-rate (perhaps 15 percent) corporate income tax. That would be the most practical way to continue collecting some tax from foreigners investing in the United States and it would address the revenue shortfall.
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3 years ago
Alan Viard
Resident Scholar
Many thanks for your comment. We are considering modifying the proposal to maintain a low-rate corporate income tax. That would be the most practical way to collect some tax from foreigners investing in the United States and it would also help address the revenue gap.

It is possible that a few wealthy shareholders might give up their U.S. citizenship, but it's hard to imagine that very many would take such a drastic step. Despite all the media coverage, the number of citizenship renunciations is still quite low. Individual residence is vastly less mobile than corporate charters or the location of corporate profits. Indeed, if individual residence ever becomes too mobile to serve as a tax base, there won't be anything left to tax except land.
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Alan Viard
Resident Scholar
Many, many, thanks for your comment. We do believe that our plan would strengthen the American economy and would benefit communities throughout the country. See more
Alan Viard
Resident Scholar
Many thanks for your comment. The corporate income tax is essentially a tax on job creation in the United States. Its elimination would dramatically reduce the cost of capital for manufacturing companies, and other companies, operating in the United States. See more

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