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Proposal: Reform Corporate Income Tax - v2.0 10/17/16 update//PROPOSAL ARCHIVED March 15, 2018

Do you want to live and work in a thriving American economy? Then explore how we can keep American companies here, attract investment into the US, and boost productivity, wages, and living standards for us all--the American workers.

The Issue

Problem Defined

The US corporate income tax is broken. Our tax rate is the highest in the developed world, yet we collect less corporate tax revenue as a share of gross domestic product than many of our trading partners. The tax discourages firms from investing in the US. It also enables multinationals to avoid tax by shifting profits to low-tax countries.

Background
Expand all bullets
1.
1. The US has the highest statutory corporate tax rates among developed countriesMORE

2.
2. The current US tax system encourages companies to invest, book profits and move charters abroadMORE

The US can impose corporate tax only on income companies earn within our borders and income of companies legally based in the US. US tax law defines a company's residence as the place where its charter was issued. But that legal home may not be where many of the company's investments, employees, customers and shareholders are located. 

The current tax system:

  • encourages companies to switch from US to foreign charters through "inversions"
  • spurs buyouts of smaller US firms by foreign-based competitors
  • diverts investment opportunities away from US-chartered companies

And there’s more: Intangible assets such as patents, and brand name, and reputation contribute to profits throughout the world no matter where they are located. Multinational companies can avoid tax by shifting their intangible assets and their profits to low-tax countries.

3.
3. The double taxation built into the current corporate income tax is a vestige of the pastMORE

Double Taxation: Congress adopted the corporate income tax in 1909. Publicly-traded companies and other C corporations1 pay corporate income tax on their profits, which include dividends paid to shareholders. Their shareholders also pay tax (at preferential rates) on dividends1 and capital gains1 from these companies.

Pass-through businesses:1 Sole proprietorships and partnerships taxed only at the owner/investor level under the individual income tax and do not pay corporate income tax.

New company structures: Congress and the IRS have started moving away from double taxation. Over the past 55 years, they have extended pass-through treatment to more businesses that have the same limited-liability benefits as corporations. In 1958, Congress allowed small corporations to receive pass-through treatment as S corporations.1 In the 1990s, the IRS allowed limited liability companies (LLCs) and limited liability partnerships (LLPs) to be taxed as partnerships and Treasury enacted “check the box” rules that made it easy for firms that are not publicly traded to choose to be taxed as pass-through businesses.

Most publicly-traded companies, however, are still C corporations that are subject to double taxation.

1 See bullet #6 below for definitions of terms

4.
4. The current tax system treats companies unequally based on financing and organizational formMORE

Corporate equity-financed investments are taxed at a higher rate than debt-financed and pass-through companies. Corporations financed by debt pay lower effective tax rates than those financed by equity because they can deduct interest expenses. This unequal tax treatment encourages corporations to raise their debt levels, increasing their financial vulnerability.

Below are two companies. They are both located in the same city in the US, and they both have the same operating profit, but have different financing.

Note: The example assumes that the investment receives no corporate tax preferences and that all after-tax profits are paid out as dividends.

5.
5. Other reforms now being considered don't adequately address the current system's harmful effectsMORE

Congress is entertaining several tax reform proposals. These proposals would expand some perverse incentives while trying to minimize others.

6.
6. Key Terms & DefinitionsMORE

Go deeper
1.
Major Surgery Needed: A Call for Structural Reform of the US Corporate Income Tax

Eric Toder and Alan D. Viard - A Joint Publication of the American Enterprise Institute and the Tax Policy Center (2016)

https://www.aei.org/wp-content/uploads/2016/06/A-proposal-to-reform-the-taxation-of-corporate-income.pdf

Pages 4-11 describe and critique the current corporate income tax system and the proposals under consideration in Congress. Pages 12-45 describe the details of the authors' proposal. Pages 46-63 present the expected benefits of the proposed changes to the corporate income tax.

2.
A Call for Structural Reform of the US Corporate Income Tax

Conference participants: Eric Toder, Alan D. Viard, David Wessel, Martin A. Sullivan, Pamela Olson - Conference co-sponsored by Urban-Brookings Tax Policy Center and American Enterprise Institute (2014)

https://www.youtube.com/watch?v=Bugm6cpuirI

Toder and Viard present their proposal (and an alternative proposal on international coordination) at a conference co-sponsored by the Tax Policy Center and AEI. Pamela Olson of PricewaterhouseCoopers and Martin A. Sullivan of Tax Analysts comment on the proposal. David Wessel of the Brookings Institution moderates.

3.
Scrap Corporate Income Tax, And Make Shareholders Pay

Eric Toder and Alan D. Viard - Market Watch (2014)

http://www.marketwatch.com/story/tweaking-corporate-tax-system-doesnt-go-far-enough-2014-08-05

The authors describe their proposal and why we need it in an op-ed in Market Watch. Upon its release in April 2014, the proposal received widespread media attention. It drew another round of publicity that summer with a wave of corporate inversions sending US companies abroad, prompting the authors to write this article.

4.
A Combined Mark-to-Market and Pass-Through Corporate-Shareholder Integration Proposal

Joseph Dodge - NYU Tax Law Review (1995)

Dodge Mark-to-Market and Pass-Through.pdf

In this 1995 article, Professor Joseph Dodge, a leading tax expert, advanced a proposal to replace the corporate income tax with shareholder taxation. Although some of the details are different, his proposal followed the same broad approach as this proposal.

5.
Corporate Income Tax Rate

Organization for Economic Co-Operation and Development - (2015)

http://stats.oecd.org//Index.aspx?QueryId=58204

The OECD tax database provides information on corporate income taxes that are levied in the 34 OECD member countries. The table shows 'basic' (non-targeted) central, sub-central and combined (statutory) corporate income tax rates. Where a progressive (opposed to flat) rate structure applies, the top marginal rate is shown.

Expert Authors

URBAN INSTITUTE, founded in 1968 to understand the problems facing America’s cities and assess the programs of the War on Poverty, brings decades of objective analysis and expertise to policy debates — to open minds, shape decisions, and offer solutions through economic and social policy research.  It is regarded as one of the preeminent think tanks in the US.  Along with BROOKINGS INSTITUTE, another preeminent think tank, the Urban Institute sponsors the URBAN-BROOKINGS TAX POLICY CENTER.

AMERICAN ENTERPRISE INSTITUTE is committed to expanding liberty, increasing individual opportunity and strengthening free enterprise through research and education on government, politics, economics and social welfare.  It is regarded as one of the preeminent think tanks in the US.

As these organizations do not take institutional positions, this proposal reflects the views of the individual authors.

Funding for the research of Toder and Viard has been provided by The Peter G. Peterson Foundation, which focuses on America's fiscal challenges, and The Laura and John Arnold Foundation, which focuses on criminal justice, education, and public accountability.

Eric Toder
Institute Fellow - Urban Institute
Eric Toder is an Institute Fellow at the Urban Institute and co-director of the Urban-Brookings Tax Policy Center. Dr. Toder’s recent work includes papers on ways of limiting tax expenditures, using a carbon tax to pay for corporate rate cuts, cutting tax preferences to pay for lower tax rates, tax expenditures and the size of government, tax policy and international competitiveness, value added taxes, the home mortgage interest deduction, trends in tax expenditures, the distributional effects of tax expenditures, corporate tax reform, charitable tax incentives, taxation of saving, the tax gap, effects on retirement income of changes in pension coverage and stock prices, employing older workers, and energy tax incentives. 

Dr. Toder previously held a number of positions in tax policy offices in the U.S. government and overseas, including service as Deputy Assistant Secretary for Tax Analysis at the U.S. Treasury Department, Director of Research at the Internal Revenue Service, Deputy Assistant Director for Tax Analysis at the Congressional Budget Office, and consultant to the New Zealand Treasury. 

He received his Ph.D. in economics from the University of Rochester in 1971.
Alan Viard
Resident Scholar - American Enterprise Institute

Alan D. Viard is a resident scholar at the American Enterprise Institute (AEI), where he studies federal tax and budget policy.

Prior to joining AEI, Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University. He served as a visiting scholar at the US Department of the Treasury’s Office of Tax Analysis, a senior economist at the White House’s Council of Economic Advisers, and a staff economist at the Joint Committee on Taxation of the US Congress. While at AEI, Viard taught public finance at Georgetown University’s Public Policy Institute. 

Earlier in his career, he was a visiting scholar in Japan at Osaka University’s Institute of Social and Economic Research.

A prolific writer, Viard is a frequent contributor to AEI’s “On the Margin” column in Tax Notes and was nominated for Tax Notes’ 2009 Tax Person of the Year. He has testified before Congress, and his work has been featured in a wide range of publications, including Room for Debate in The New York Times, TheAtlantic.com, Bloomberg, NPR’s Planet Money, and The Hill. Viard is the coauthor of “Progressive Consumption Taxation: The X Tax Revisited” (2012) and “The Real Tax Burden: Beyond Dollars and Cents” (2011), and the editor of “Tax Policy Lessons from the 2000s” (2009).

A native of Kansas, Viard received his BA in economics from Yale and his PhD in economics from Harvard. He completed the first year of the JD program at the University of Chicago Law School, where he qualified for law review and was awarded the Joseph Henry Beale prize for legal research and writing.

The Solution

Proposed Actions
Expand all bullets
1.
1. Reduce the corporate income tax rate to 15%MORE

This reduction would occur over a ten-year period (see recommendation #7 below).

2.
2. Tax shareholders at ordinary income tax rates with credit for corporate income taxes paidMORE

American shareholders of publicly-traded companies would be taxed on their dividends and capital gains at full ordinary income tax rates, up to 39.6%, rather than today's 20% top capital gains tax rate. This tax increase would be introduced over a ten-year period. The 3.8% net-investment-income tax would also continue to apply to dividends and capital gains.

Capital gains taxes would be imposed on an accrual basis:

  • Shareholders would pay tax on their accrued capital gains as the stock rose in value, even if they had not sold their shares.
  • Shareholders would deduct accrued capital losses as the stock fell in value, even if they had not sold their shares. Capital losses could be deducted from current income without limit, carried back to be deducted from the previous two years' income (triggering refunds of taxes paid on past income), or carried forward to be deducted from the next 20 years' income. 

To prevent double taxation, American shareholders would receive a tax credit for their share of the US income taxes paid by the US firms whose stock they own. However, foreign shareholders, nonprofit organizations, and tax-preferred retirement plans would not receive the credit because they generally don't pay a second level of tax on their dividends.

Gains and losses on non-publicly-traded businesses, land, and other assets without established market prices on organized exchanges would continue to be taxed only when the assets are sold and would still receive the preferential capital gains tax rate. However, previously untaxed gains on these assets would be taxable (at the preferential rates) when the owner dies.

3.
3. Smooth accrued gains and losses to reduce tax volatility MORE

Because the stock market is volatile, shareholders might have large accrued gains in some years and large accrued losses in other years. To make tax payments less volatile and limit the need for shareholders to sell shares to pay tax in years with big gains, the gains and losses would be smoothed. In each year, 20% of the gain or loss would be taxed or deducted and the other 80% would be placed in a pool of unrecognized gains and losses. In each year, 20% of the balance in the pool, in addition to 20% of the new gains and losses, would be taxed or deducted.

So, if a shareholder had a $100 gain one year, $20 would be taxed in that year and $80 would be placed in the pool. In the next year, $16 of the $80 would be taxed (because 20% of the pool balance would be taxed). In the following year, $12.80 of the remaining $64 would be taxed, and so on. Gains and losses would therefore be smoothed over many years. It would not be necessary, however, to keep track of all the past years, as a single number (the pool balance) would be the only information needed.

The smoothing would apply to dividends and capital gains and losses on corporate stock, whether or not the stock was sold. The shareholder credit for corporate tax paid at the company level, which was discussed in Recommendation 2, would also be smoothed. 

4.
4. Provide transition relief for privately held companies that go publicMORE

Capital gains accruing after a privately held company went public would be taxed as they accrue under the proposal’s general rules (including the credit for corporate taxes paid at the company level and the application of geometric smoothing). However, special rules would apply to the gains that had accrued before the company went public, but that had not yet been taxed because the owners had not sold their ownership stakes. Three-quarters of those previously accrued gains would be exempt from tax and the remaining one-quarter would be included in the owners’ taxable income over a ten-year period. These rules would ensure that companies did not face an undue tax penalty for going public. For further details about this provision, please see pages 23-25 of “A Proposal to Reform the Taxation of Corporate Income” (see full reference below).

5.
5. Exempt small shareholders from taxes on dividends and capital gainsMORE

The first $500 ($1,000 for couples) of dividends and accrued capital gains would be exempt from tax each year. As a result, small shareholders would not have to deal with accrual taxation, the shareholder credit, and the geometric smoothing system. This exemption would remove a large number of shareholders from the capital gains tax system with relatively little revenue loss.

6.
6. Impose a 15% tax on the interest income of non-profit organizations and retirement plansMORE

Today, non-profit organizations and retirement plans do not pay an explicit tax on their investment income. However, their income from corporate equity bears a 35% tax burden – the corporate income tax collected from the companies whose stock they’re holding. The proposal would reduce that tax burden to 15%. To offset that gain and to make the tax burden more equal across debt and equity holdings, a 15% tax would be imposed on the interest income of non-profit organizations and retirement plans.

7.
7. Establish transition arrangementsMORE

Once the reform took effect, shareholders of publicly-traded companies would pay tax on accrued annual gains and deduct accrued annual losses.

Over a ten-year period, the individual income tax rate on dividends and newly-accrued capital gains would be increased to the ordinary individual income tax rate. Over the same period, the corporate income tax rate would be reduced to 15%.

The chart below shows the corporate income tax rate and the top individual income tax rate on dividends and newly-accrued capital gains. The 3.8% net-investment-income tax (not shown below) would also still apply to dividends and capital gains. The chart assumes that the reform is enacted in 2016 and starts to take effect in 2018.

The following rules would apply to capital gains that had been accrued before January 1, 2018, but that had not been taxed (because the shares had not been sold). The first $10,000 of these previously accrued gains would not be taxed. Three-quarters of the gains above that threshold would also not be taxed. The remainder – one-quarter of the gains above the threshold amount – would be included in taxable income, spread over the ten-year period from 2018 through 2027. This treatment of previously accrued gains would, on average, roughly approximate the treatment they would have received under previous law, under which they would have been taxed at preferential rates if and when they were realized through the sale of the shares.

Other transition rules would also apply to a variety of specialized circumstances.

For further details about the transition rules, please see pages 38-42 of “A Proposal to Reform the Taxation of Corporate Income.”  

Expected Results
Expand all bullets
1.
1. Companies would have little tax incentive to move their charters abroadMORE

The US tax system would no longer provide significant incentives for companies to move their corporate charters abroad. The shareholder tax would not depend on where the corporation was chartered and the corporate tax would be much lower. The tax incentive for inversions would be greatly diminished. US companies would face little or no tax on overseas income, after applying credit for foreign income against their 15% US tax.

2.
2. Investment in the United States would increaseMORE

With our current tax system, both US and foreign companies are taxed on profits earned in the United States, with less tax, or no tax, on profits earned abroad. The current corporate tax discourages both types of companies from investing in the United States. Reducing the corporate income tax rate to 15% would greatly reduce that effect. Capital would flow into the US, boosting US job creation, productivity, wages and standard of living. By keeping a 15% corporate income tax, we'd ensure that foreign shareholders pay some U.S. tax when they invest here, but the rate would be low enough that it wouldn't drive their money out of our economy. The size of the gain would depend on several factors, including how other countries reacted to the US reform. 

3.
3. Companies would book additional profits in the United StatesMORE

Because the United States would have a much lower corporate tax rate, both foreign and US companies would book additional profits in the United States rather than abroad. The tax on those additional profits would offset part of the revenue loss from the corporate tax rate cut. State governments with corporate income taxes would also receive additional revenue from taxing those increased profits.

4.
4. Tax treatment would be more equal for companies with different financing and organizational formMORE

Publicly-traded equity-financed and debt-financed companies would receive equal tax treatment. Companies would be free to choose the best capital structure for their businesses without worrying about tax consequences.

Compared to today's system, the tax treatment of publicly-traded and non-publicly-traded businesses would be more similar than under current law (for American owners.) Neither type of business would be subject to double taxation:

  • Owners of publicly-traded businesses would pay tax on their dividends and accrued capital gains. The corporate income tax would be offset by a tax credit for American shareholders.
  • Owners of non-publicly-traded businesses would continue to pay tax on their share of the business' income.

The charts below show the taxes that would be paid by the two companies (described in background point 4) under the reform plan.

5.
5. The proposal would not open up new opportunities for tax avoidanceMORE

Although the corporate income tax rate would be much lower than the top individual tax rate (15% compared with 43.4%), corporate profits could not be sheltered from full-rate tax by being reinvested and shareholders delaying selling their stock. Reinvested profits would show up in accrued capital gains, which would be taxed each year at the ordinary income tax rate, even if shareholders held onto their stocks for an extended period.

6.
6. The tax system would become slightly more progressiveMORE

The Urban-Brookings Tax Policy Center estimates that the top 1% of households would pay slightly more taxes than under current law and that all other income groups would pay slightly less. This occurs because the higher shareholder taxes fall almost entirely on upper income individuals with investment income, while a portion of the corporate tax cut will raise workers’ wages by increasing investment in the US, thereby raising capital per worker and labor productivity.

Budget
Budget Impact

The Urban-Brookings Tax Policy Center estimates the plan would be approximately revenue neutral in the long run; it may even raise revenue if the taxes collected on the additional profits that are likely to be booked into the US in response to a reduced corporate tax rate are counted. 

Net Present Value


The Conversation

David Fridley
President
2 years ago
Could we consider other problems like economic stability when redesigning the corporate tax structure? In business, in deciding salaries, there is a term: "you get what you incent". Can we consider other problems related to the national economy and design in the ability to incent what we want to have happen. Here are some examples:

As a nation, when people get laid off, it costs us money in terms of social programs to support them and hopefully getting them back into work force. Could we provide incentives that reward companies for not laying off people. For example, that 15% minimum could get a 10% discount (to 13.5%) for business that have not laid anyone off in the last 10 (or so) years.

As a nation, we are have a problem with the growth in the cost of healthcare relative to the growth in people's salaries, and this is especially hard at the low income level. As a nation, we end up footing the bill for these people through social programs and through higher costs because of providers distribution uncollected depts. onto what they bill everyone else. What if we created a Healthcare Adjustment Tax for Corporations that was directly related to the cost of healthcare v. the average wage. So, if the average cost of healthcare was more than 10% the average wage (for example), then the Healthcare Adjustment Tax would kick in. But if the average cost of healthcare was less than 10% of the average wage (again 10% is an example that might not be the right number), then there would not be a Healthcare Adjustment Tax. And the Healthcare Adjustment tax could be a 10% (for example) increase to 16.5%. The expected result of this would be more pressure to increase wages at the lower end, as well as more pressure and hopefully innovation, in controlling the growth of healthcare costs.

I'm not saying these are the perfect proposals, and the experts may have more info and better ideas on this, but can we build it in.

Right now I would say that our tax system is incenting corporations to leave the country and to recognize as much as they can out of the country. But as we correct that incentive, should we also consider high level incentives to motivate more economic stability. The choice of a 15% tax rate, seems completely arbitrary but if we put some thought into how the tax rate is decided and used it to incent outcomes that would benefit us all, wouldn't that be better?



Alan Viard
Resident Scholar
2 years ago
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.
David Fridley
President
2 years ago
In the Problem it says: ...yet we collect less corporate tax revenue as a share of gross domestic product than many of our trading partners.

This seems like a very powerful statement, but is it true? I have not heard this before, and I do not see any supporting detail. Also, I do not see the supporting graph of this like the on that shows the corporate tax rate. But I think this would be a compelling reason for more people engaged.
Alan Viard
Resident Scholar
2 years ago
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.
3 years ago
I very much enjoyed this proposal. While at first it sounds almost radical, it really just seems logical at this point. While corporate decisions to invert are inherently harmful to a country with a deficit problem, I have had trouble getting upset at those companies who chose to do so. It just seems as though it was a fiscally smart decision for those companies who were simply try to maximize profits and keep shareholders happy. This is why I found the proposal so great. It curtails incentives for companies to try to harmfully reduce their tax burden, such as though inverting, while helping to eliminate the part of the tax code with the most economic distortion.

Personally, I find the initial revenue loss of $170 billion per year to be worth it. That number, while obviously large, seems like it would be worth it especially if this plan prevented more inversions, which would have reduced revenue anyways. With this is mind, I would be interested in the ideas for spending cuts to offset this loss. The proposal did note some potential tax increases, and it would be interesting to hear about them in more depth at some point.

The issue of revenue loss certainly is exacerbated by the taxation of foreigners issue. It does seem to me to be inherently unfair that they would avoid taxes while Americans could not. That is why I really found the idea of a low corporate tax compelling. That is, that shareholders could claim their share of the corporate tax payment as a tax credit so that only foreign investors are paying the burden for the corporate tax. This seemed really smart, and like it would go a long way to solving some of the plans issues.

Alan Viard
Resident Scholar
3 years ago
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.
3 years ago
This proposal appears to be rather comprehensive; however there appears to be two potential issues. The elimination of the corporate income tax must mean that foreign investors would no longer have to pay any taxes on their investments. While this would naturally incentivize foreign investment, I believe that this would be taking things too far. A relatively low tax rate would stimulate foreign investment while still generating revenue.

The other issue lies in the loss of revenue when switching from the corporate income tax to this proposal. This is not necessarily an enormous issue, and the proposal shouldn’t necessarily be changed to close this gap, but it is still something that should be more seriously addressed.
Alan Viard
Resident Scholar
3 years ago
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.
3 years ago
I am strongly in favor of the purest version of this plan, however I do believe that in order to move in the right direction it is necessary to move incrementally and be pragmatic. One thought I have about the plan is the effect this transition will have on companies that are already accustom to operating overseas or that already have a charter in another country with a 0% corporate tax rate for example. A middle ground 'competitive' rate as some suggest, even of 15%, may not be sufficient in drawing certain strata of business and investment back into the domestic economy. Would there be room in the proposal for a certain incentive for drawing corporations back into the US, as is the original purpose, if the plan does eventually come to fruition in the middle ground? Such an incentive may be to increase the tax liability on dividends and capital gains of corporations that are registered and/or book profits abroad. This however complicates things by straying from the normal rate on financial assets and may likely prompt pitfalls similar to tariffs.
Alan Viard
Resident Scholar
3 years ago
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.
3 years ago
Although I am in favor of this plan as it would reduce the amount of corporate inversions, foreigners not paying taxes is an issue for me. While it would increase the amount of foreign investment in the United States, I am concerned that the amount of investment would not outweigh the amount of revenue lost from not taxing foreign investors. This potential loss of revenue is also a concern for me because of the increasing national debt and the $170 billion hole this plan would leave when enacted.
I think the zero tax on foreign investors should be replaced with at some tax, even if it is lower than what a US shareholder would pay so that foreign investment is not completely discouraged.
Alan Viard
Resident Scholar
3 years ago
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.
3 years ago
Having grown up in a majority working class town, the "outsourcing jobs" narrative was very prevalent. I knew lots of adults who blamed outsourcing and large companies for their inability to find a job. The same adults had iPhones. I always saw this as an ironic, considering many of these people could not buy iPhones if it weren't for outsourcing.
I agree with this proposal, but I'm interested to see how such a proposal could be sold to Americans who fundamentally lack an understanding of how globalization affects their daily life. To many lower class voters, CORPORATE income tax represents a crucial redistribution of income and equality of the playing field. Whereas a tax on shareholders using income tax rates represents the types of taxes that low income voters resent.
Any proposal can make sense or be economically viable, but unfortunately that doesn't translate into popular support. I think the real challenge faced will be convincing voters that this is in their best interest.
Alan Viard
Resident Scholar
3 years ago
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.
3 years ago
Overall, lowering the cost of business to shareholders and the corporations themselves is a prudent move to encourage investment, especially with the Federal Reserve likely to continue to raise interest rates in the near future. The proposal makes a strong case that the corporate income tax leads to significant, unwanted distortions in behavior. Therefore,it is better to at least encourage investment to grow the economy rather than drive away business to extract decreasing amounts of corporate revenue.


However, I agree with others here in that the U.S. is sacrificing too much potential revenue especially by not taxing foreigners, or even corporate profits themselves. This problem would further be exacerbated by the looming federal debt, with payments on its interest likely to rise significantly. Consequently, I feel the proposal should maintain its overall theme of low costs to corporations by out-competing other countries, but still extract some revenue through small taxes. Perhaps the proposal currently ends up on the "correct" side of the Laffer Curve? Even if it is wiser to not tax shareholders and corporations, a short term solution is still needed to collect some revenue that the government would now otherwise be forced to borrow.
Alan Viard
Resident Scholar
3 years ago
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.
3 years ago
I can't help but feel that taxing shareholders on accrued capital gains at a normal rate instead of when they sell is not the best thing. I think that many Americans would feel that they were being taxed on income that "didn't exist" in their eyes. I personally feel that capital gains, if they are to be taxed on their accrued value, not just when sold, that they be taxed at a preferential rate that reflects that these investments are not being turned into cash today. Holding on to those investments invokes a certain amount of risk that should be reflected in the tax rate.
Alan Viard
Resident Scholar
3 years ago
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.
Marc Andonian
VP/Executive Partner
2 years ago
A couple of challenges with your discussion so far. First - it seems that taxing all capital gains at the same rate does not incent individuals or corporations to invest for the long term, and may promote financially expedient behaviors such as short term layoffs, inadequate investment in design/safety, versus delivery of value over the long term. I would rather see special regulations that reduce capital gains rates more progressively based on longer term investment horizons for major shareholders and corporate insiders to ensure a long term view and business strategy. Second, it seems to me that taxing accrued but unrealized gains requires that investors keep money reserved, available/liquid (i.e., un(der)invested) to pay taxes as they are assessed based on performance and timing. This means that the reserves are not invested or working to drive the economy reducing available capital significantly. Depending on the situation, having to pay tax on unrealized gains could trigger major cash flow issues that could cascade into other problems. If, however, the taxes are based on realized gain - they can simply be subtracted from that gain - and an investor can fully invest all of their working capital. My point of view is based on that of an individual investor trying to build assets to support retirement responsibly. I look forward to your comments.
Alan Viard
Resident Scholar
2 years ago
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.
3 years ago
For me, the possibility that the U.S. will lose $150B in revenue each year is too much to justify completely eliminating the Corporate Income Tax. I believe it should be lowered to a more competitive level, perhaps 15%, until you more fully specify and describe the other ways of boosting revenue so that the whole plan is at least revenue neutral or preferably revenue positive. I am glad to see you discuss raising the capital gains and dividend income taxes and I think that there should still be some way of taxing foreign investors in U.S. corporations. They are using American infrastructure and American workers whose initial education was paid for by the U.S. government, are they not? Nevertheless, to me the whole plan feels incomplete without any fully fleshed out roadmap to fill the hole left open in the budget.
Alan Viard
Resident Scholar
3 years ago
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.
Rollout and integration plan
Deborah Devedjian
Founder & Chief Citizens' Officer
3 years ago
Would the proposal be strengthened with a timeline for the rollout and how, if, at all, corporations would be affected and then how shareholders would be affected by this new measure?

Would we need to cover short-term revenue shortfalls?

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