Making America's Budget Policy From the 1980's to the 1990's by Joseph J. Minarik

Author:Joseph J. Minarik [Minarik, Joseph J.]
Language: eng
Format: epub
Tags: General, Biography & Autobiography, Reference, Political Science
ISBN: 9781315289199
Google: hZMYDQAAQBAJ
Goodreads: 32206103
Publisher: Routledge
Published: 1990-01-01T00:00:00+00:00

Dividends

The second major difference between the Treasury and the Bradley-Gephardt proposals lies in the taxation of corporate-source income. Bradley-Gephardt continues the current approach of a separate tax on corporations. The Treasury, in contrast, provides for partial relief from the double taxation of corporate dividends, whereby corporate income is taxed once when earned at the corporate level and again when distributed as dividends. The Treasury proposal would allow corporations a deduction for half of dividends paid, thereby reducing, but not eliminating, the double tax.

The double taxation of corporate dividends is a real problem; it distorts corporate choices away from paying dividends and toward retaining earnings. When corporate retentions are routine, those earnings are reinvested not by firms that promise the greatest rate of return on new investment, but by those that are earning profits on old investment; so capital is not freely reallocated to its best uses. Again, there is a total solution to the problem, but again, the Treasury had to back off for practical reasons. The double tax can be eliminated by a method called integration: the corporate tax is in effect abolished, and all corporate income, whether distributed or retained, is attributed to shareholders and taxed only on individual income tax returns. The major problems with integration are that it would be extremely difficult, if not impossible, to report complete corporate income tax information to shareholders quickly enough for them to file timely tax returns, and that the revenue loss from eliminating the corporate tax, especially in the current budgetary stringency, would simply be too great.

The problem with the Treasury solution is that no one has a strong reason to support it. Corporate managers, on the face of it, might like to get a tax deduction; but in the final analysis, they fear that shareholders would argue for more dividends because of the deduction. Corporate managers do not want to pay more dividends, because it would increase their cost of raising investment funds. Shareholders have no pressing interest in the deduction either, because they would benefit from it directly only if they could persuade corporate managers to pay more dividends. So it is not surprising that the investment community has responded lukewarmly to the Treasury proposal despite this valuable deduction.

Again, straightforward tax reform relieves the double-tax problem, though not so much as the Treasury’s deduction for dividends paid. Simply cutting the individual and corporate tax rates reduces the double tax on dividends. For example, under the current law, corporate income taxed first at the 46 percent corporate rate and then at the highest 50 percent individual rate bears a 73 percent total tax, while corporate income taxed twice at the Bradley-Gephardt 30 percent rates bears only a 51 percent total tax. The Treasury proposal, with its deduction for half of dividends paid, exacts an even smaller total burden at just under 46 percent; but the revenue lost through this special deduction is part of the reason why the Treasury had to impose higher statutory tax rates, at 33 percent for corporations and a 35 percent maximum for individuals, than the Bradley-Gephardt bill.

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