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The Administration's Proposal to Cut Dividend and Capital Gains TaxesPublished: January 20, 2003 || Availability: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. © TAX ANALYSTS. Reprinted with permission. Note: This report is available in its entirety in the Portable Document Format (PDF). I. IntroductionIn the United States, some corporate income is never taxed, some is taxed once (either at the individual or the corporate level), and some is taxed twice. Many economists — ourselves included — would prefer a system that taxed all corporate income, but taxed it once and only once, at nonpreferential tax rates. Such a system would modify the tax incentives for various types of corporate behavior in important ways. In this article, we focus on two crucial dimensions of corporate incentives affected by the tax system: The incentive to shelter corporate income from taxation and the incentive to retain corporate earnings rather than pay dividends.1 We show that the administration’s recent tax proposal does not eliminate, and may not even reduce to a significant degree, the incentives that exist under the current tax system to shelter corporate income from taxation and then to retain the earnings. Thus, in our judgment, despite the administration’s rhetoric to the contrary, its proposal does not represent tax reform. The administration’s proposal does the “easy” part of tax reform: It cuts taxes. It fails, however, to do the difficult part of any serious tax reform effort: Broadening the tax base and eliminating the share of corporate income that is never taxed (or taxed at preferential rates). That difference is what distinguishes “tax reform” from “tax cuts.” Notes from this section 1 Other important dimensions of the incentives created by the tax system involve the effect on organizational form and corporate financing, but we focus here on the incentives to shelter funds and to retain earnings. Note: This report is available in its entirety in the Portable Document Format (PDF). |
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