In a rare bit of bipartisan consensus, lawmakers of both parties agree that the U.S. needs to fix its corporate tax system. Statutory rates are among the highest in the world, yet many firms are so good at shifting income to low-tax jurisdictions that they pay effective tax rates in the single-digits.  But while the left and right agree that something needs to be done, there is no obvious agreement on what. And, it turns out, corporate tax reform is hard.

My Tax Policy Center colleague Eric Toder and American Enterprise Institute resident scholar Alan Viard have come up with one solution. Building on a plan they first proposed in 2014, Eric and Alan would sharply lower corporate tax rates while directly taxing shareholders on their investment income at ordinary income rates. These investors would be required to pay tax on dividends and on accrued capital gains each year, whether or not they sold their shares. The proposal is intended to raise the same amount of tax revenue as the current business tax system. I’ll be moderating a panel discussion on the plan with Eric and Alan this morning. To listen in, click here.

The plan aims to accomplish several important goals. It would: treat debt and equity financing roughly equally, ending the current bias in favor of corporate borrowing; reduce the tax penalty on firms that are organized as corporations, whose profits are sometimes taxed twice; and end incentives for U.S.-based multinationals to shift income, investments, and even legal residence overseas. Finally, it would tax investment income of U.S. residents without discouraging them from selling stock and taking profits.

Eric and Alan base their concept on one big idea: Because shareholders are relatively immobile, it is easier to tax corporate profits at the investor level than at the corporate level. Today, the U.S. bases taxes on the source of a firm’s income or its legal residence, two factors that can be easily manipulated by a company looking to minimize its tax bill.

The plan builds from that framework with several key specifics. It would:

• Cut the corporate income tax rate from a maximum of 35 percent to 15 percent. An earlier draft would have repealed the corporate tax, but the new version retains a modest levy. The rate is low enough that it should discourage much of the gaming that currently erodes the corporate tax base. Yet it would make it possible to collect some tax from foreign investors, non-profits, and retirement plans that would otherwise pay no direct tax. Taxable shareholders would receive a credit to offset any investor-level tax they pay. The remaining corporate tax also makes it easier for states to retain their own tax on firms.
• Tax investors on accrued gains, whether they sell their stock or not. They’d be required to mark-to-market the value of their investment each year and pay tax on any increase in value. The proposal would allow investors to smooth the value of their shares over multiple years, by allocating a portion of any realized or unrealized gains into future years.  
• Impose a new 15 percent tax on interest paid to non-profits and retirement plans. This would offset the benefit these investors would receive on their holdings in firms that would pay the lower 15 percent corporate rate.
• Tax all firms that do not issue publicly-traded stock as pass-throughs, such as S corporations, partnerships, or limited liability corporations. Owners would be taxed at individual income tax rates on their share of the firms’ profits. Capital gains would be taxed only when they are realized and at preferential rates.  

Later this month, we may see a business tax plan from Senate Finance Committee chair Orin Hatch (R-UT) and a broader (though probably less detailed) tax reform plan from House Republicans. Congress won’t act on any of these ideas this year, but they’ll all get renewed attention in 2017. I expect the Toder and Viard plan will be in that mix.