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fbtwitterlinkedinvimeoflicker grey 14rssslideshare1
Rosanne Altshuler; Benjamin Harris; Eric Toder (2011)
Types: Preprint
Subjects: corporate taxation, individual taxation
jel: jel:H20, jel:H25, jel:H24
The increase in international capital mobility over the past two decades has put pressure on the tax treatment of corporate equity income. Corporate-level taxes distort investment flows across locations and create opportunities for tax avoidance by shifting income across jurisdictions. Outward flows of capital shift part of the burden of the corporate-level tax on equity income from capital to labor, thereby making its incidence less progressive. Individual-level taxes on corporate equity income lower the after-tax return to savings but have less distorting effects on investment location and are more likely to fall on owners of capital than workers. This logic suggests there may be both efficiency gains and increases in progressivity from shifting taxes on corporate equity income from the corporate to the shareholder level. We estimate the distributional effects of a tax reform that raises shareholder-level taxes on corporate equity income and uses the revenue to cut the corporate tax rate. We find that taxing capital gains and dividends as ordinary income (subject to a maximum 28% rate on long-term capital gains) would finance a cut in the corporate tax rate from 35% to about 26%, assuming no behavioral response. While the distributional effect depends on what one assumes about the incidence of the corporate income tax, our results suggest that even if the corporate income tax were paid entirely by capital income, the reform would make the tax system more progressive.
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    • WHO PAYS THE CORPORATE INCOME TAX? ........................... 360
    • A. Open Economy Incidence in General Equilibrium Models.................................................................................... 362
    • B. Empirical Incidence Analysis .............................................. 366
    • C. Other Considerations............................................................ 369
    • III. EFFECTS OF A TAX SHIFT FROM THE CORPORATE TO THE INDIVIDUAL LEVEL...................................................................... 370 A. Distributional Effects............................................................ 370 B. Behavioral Responses and Revenue.................................... 372
    • IV. SIMULATIONS AND METHODOLOGY ......................................... 374 A. Simulations ............................................................................ 374 B. Methodology.......................................................................... 375 15 See William Randolph, International Burdens of the Corporate Income Tax 5
    • (Congressional Budget Office, Working Paper 2006-09, August 2006), available at
    • http://www.cbo.gov/ftpdocs/75xx/doc7503/2006-09.pdf. 22 This section borrows heavily from Benjamin Harris, Corporate Tax Incidence
    • Paper, November 2009), available at http://www.urban.org/UploadedPDF/1001349_
    • corporate_tax_incidence.pdf. 23 See, e.g., Kevin Hassett & Aparna Mathur, Taxes and Wages 9, 10 (Am.
    • Enterprise Inst., Working Paper 128, March 2006), available at http://www.aei.org/
    • docLib/20060602_HassettMathur.pdf. 24 See, e.g., R. Alison Felix, Passing the Burden: Corporate Tax Incidence in
    • Open Economies 11, 28 (Fed. Res. Bank of Kansas City, Working Paper RRWP 07-
    • 01, 2007), available at http://www.kc.frb.org/Publicat/RegionalRWP/RRWP07-01.pdf. 25 See Jane Gravelle & Thomas Hungerford, Corporate Tax Reform: Issues for
    • Congress, CONGRESSIONAL RESEARCH SERVICE REPORT FOR CONGRESS, Oct. 31,
    • 2007, at 16. 26 Mihir Desai, Fritz Foley, & James Hines, Labor and Capital Shares of the
    • Corporate Tax Burden: International Evidence (draft manuscript, December 2007). 27 Wiji Arulampalam, Michael P. Devereux, & Giorgia Maffini, The Direct
    • Taxation Working Paper 09/17, 2009). 36 Kimberly Clausing, Multinational Firm Tax Avoidance and Tax Policy, 62
    • NAT'L TAX J. 703 (2009). 37 Rosanne Altshuler, Alan Auerbach, Michael Cooper & Matthew Knittel,
    • Understanding U.S. Corporate Tax Losses, 23 TAX POLICY AND THE ECON. 73, 99
    • (2009). 38 For further discussion see Daniel Halperin, Mitigating the Potential Inequity of
    • Reducing Corporate Rates (July 29, 2009) (Urban-Brookings Tax Policy Center
    • Working Paper). 39 For a review of studies on the effects of capital gains tax rates on realizations
    • Realizations, Revenues, Efficiency and Equity, 48 TAX L. REV. 419 (1993). 40 See, e.g., Raj Chetty & Emmanuel Saez, Dividend Taxes and Corporate
    • Behavior: Evidence from the 2003 Dividend Tax Cut, 120 Q. J. OF ECON. 791 (2005);
    • Payout Policy: Firm Responses to the 2003 Dividend Tax Cut, 62 J. FIN. 1935 (2007). 41 For empirical work on the substitutability of dividends and share repurchases,
    • Substitution Hypothesis, 57 J. FIN. 1649 (2002).
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