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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.

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

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. 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. 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. 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. Key Terms & DefinitionsMORE

Go deeper
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)


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.

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)


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.

Scrap Corporate Income Tax, And Make Shareholders Pay

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


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.

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.

Corporate Income Tax Rate

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


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. Reduce the corporate income tax rate to 15%MORE

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

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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 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

Claire Kopsky
College Student
3 years ago
Will tax treatment actually be even for companies with different financing and organizational form?
Alan Viard
Resident Scholar
3 years ago
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.
a year ago
What would be the cause of the uneven tax treatment?
4 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
4 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.
4 years ago
Overall, I am definitely in favor of this proposal as it would mitigate the problem of corporate inversions while resulting in a more balanced tax treatment for different types of companies. Due to incentivizing foreign investment into the US, this proposal would definitely result in net gains- and, assuming the best possible reaction of other countries to this reform, would hopefully thereby lead to an inflow of capital and increase our number of jobs and standard of living. As other commenters have pointed out, I would be interested in knowing the effects of this reform on the stock market due to individual shareholders invariably filling the void resulting from the elimination of corporate taxes. Thank you.
Alan Viard
Resident Scholar
4 years ago
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.
4 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
4 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.
4 years ago
I think this is a great proposal to address the issue of corporate inversions. However, I think the tax proposal in its current form brings forth a handful of new problems. For one, the estimated annual revenue reduction of $170 million is extremely problematic for the United States given our rising national debt. I am also interested to know if the increase in tax rates on dividends and capital gains would lower savings.

Overall, I think two changes that could be made to the proposal to make it more practical would be to tax foreign investors, and to keep the corporate income tax, but to lower it to a rate that is more competitive with the rest of the world.
Alan Viard
Resident Scholar
4 years ago
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.
4 years ago
The first question that came to mind after I read the proposal is: how will this affect regulation? Since the crisis, large companies have increased the size of their compliance departments because the government has kept such a watchful eye. Will this now shift to individuals? I wonder if that shift has an effect on the government's cost to regulate, maybe it doesn't carry an effect at all. Your study concluded that this new proposal will bring half of the current revenue, so I'm interested to see your recommendations to supplement the current proposal. Like you said, removing the corporate income tax brings investments back to the United States and fuels the economy. As well, I agree with the approach to balance the tax burden on companies that are more equity-financed vs. debt-financed. If companies make decisions based on the way they are taxed, then the tax code is encouraging corporations to be highly leveraged.
Alan Viard
Resident Scholar
4 years ago
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.
4 years ago
The elimination of some of the corporate income tax reporting complexities, such as the depreciation schedules and inventory accounting, is a positive consequence of this proposal. I wonder, however, how the proposal addresses the increased complexities for individual income reporting. Specifically, adding a tax on the value change of a share, either by averaging the share value or some other method, creates an extra burden on individuals, and I would argue puts the greatest burden on the “little” investor who cannot afford to hire an accountant. I realize that many shareholders are wealthy and already employ professional help, but I worry that some of the smaller shareholders would no longer invest. I can also imagine that larger shareholders could afford to “play” the market to move around stocks to minimize the net value increase or otherwise find the “loopholes” to maximize benefits. Under the current tax code, at least the playing field appears more level when corporations alone are in the game.

Furthermore, I can imagine the stock market itself being affected by the new tax laws. For example, in order to moderate the affect of a “value” tax, the tax value of a stock might be calculated as an average of 10 years. If this is the case, won’t investors consider both this average and the current market value of the stock? How will this added consideration impact the buying and selling of stocks overall? Wouldn’t smaller investors be at a disadvantage for buying stock in any company that is “taking off” if the investor has to be prepared to pay taxes before having the profit in hand? (This is a fairness question for everyone in the new system, especially if they buy stock early in a highly successful company’s entrance into the market.)

However, the proposal to make the rates paid graduated instead of a set amount, making the system more progressive, has many merits. I also think that its equal treatment of all types of businesses, thus discouraging becoming a pass-through business, makes a lot of sense.
Alan Viard
Resident Scholar
4 years ago
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.
4 years ago
In a hypothetical situation, say the corporate tax rate is cut and shareholders are then taxed (or some modified version with a sizable reduction corporate tax rate and moderate increase in shareholder taxes)... Has the consideration of what foreign government's reaction to America's change been discussed? In theory under the new plan, firms will want to invest and move back to into the US and presumably the American economy grows because of this and internal investment by corporations. If this happens and the economy grows relative to the rest of the world, couldn't it be said that the dollar would appreciate at a noticeably greater rate than foreign economies? The loss of revenue from previously domestic firms that moved to the US as well as foreign investment to these corporations would have a serious drawback to foreign countries. As time passes and the US economy takes off, will foreign governments just sit back and lose their competitive edge versus the US? Or will they find a way to either drop their corporate tax rates (or increase other motivators), essentially starting a war on corporate tax rate?<--(my thinking is similar to a trade war)... Understanding that this of of course is all hypothetical, who's to say something such as this doesn't occur 5-10 years down the road?
Alan Viard
Resident Scholar
4 years ago
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.

This proposal is now closed.

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