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A public policy blog from AEI
The House Ways and Means committee held a hearing today on tax reform and its potential impact on economic growth. So despite all the political tumult in Washington right now, the legislative process continues. And while there is plenty of skepticism among observers and insiders that tax reform will happen this year (including by me), House Speaker Paul Ryan vows it will.
A note by JPMorgan out yesterday is also skeptical about reform passing this year. It also doubts whether any final product will resemble what Ryan has been pushing for: “Absent a backup plan, the slow demise of Ryan’s Better Way program is revealing the tough road ahead to getting anything big done on corporate tax reform.”
But what I really wanted to highlight was this bit:
Another approach, which has considerable support among tax policy experts, would be to raise personal dividend and capital gains tax in a manner that would offset the revenue lost from a lower corporate tax rate, while leaving the definition of corporate taxable income unchanged. For example, if dividends and capital gains were taxed at the same rate as ordinary income the corporate tax rate could be lowered to around 15% in a deficit-neutral manner. A longstanding principle of tax economics is that it is easier to tax the least mobile factor of production. With corporate activity becoming increasingly mobile, the burden of taxation is falling more on individuals, who are less likely to change countries of residence for mere tax purposes. This trend can be seen in the US and even more so in the global group of advanced economies (Figure 1). The ongoing race to the bottom is occurring in corporate tax rates, not in individual tax rates. In fact, many of the countries that have lowered corporate tax rates have paid for them through increases on capital income taxes at the individual level. While inexorable forces are pushing more of the burden of capital income taxation from the corporate level to the personal level, that doesn’t mean this Congress will go along. So far a handful of Senators have pushed for corporate tax integration, but there appears to be no tangible momentum behind this idea in the House.
If the above plan sounds familiar to AEIdeas readers or AEI fans, it should. My AEI colleague Alan Viard on how to get to a 15% corporate tax rate:
One approach would be to offset the lower corporate rate by raising taxes on dividends and capital gains received by American shareholders. Dividends and gains would be taxed at ordinary rates rather than the preferential rates that now apply. Because the taxes paid by the shareholders would not depend on where the corporation invested, booked its profits, or was chartered, shareholder taxation would avoid the harmful incentives of the corporate income tax.
Taxing capital gains at higher rates would pose challenges. Because gains are taxed only when shareholders sell their stock under today’s rules, higher tax rates would give shareholders a stronger incentive to postpone taxes by hanging on to their shares. That incentive could be eliminated by taxing shareholders each year on the rise in the value of their stock holdings, whether or not they sell.
Gains could be averaged over a number of years to smooth out stock market volatility and small shareholders could be exempted from tax. Eric Toder of the Urban Institute and I recently developed a plan that would lower the corporate tax rate to 15 percent and offset the revenue loss with higher shareholder taxes.
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