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Decoding the U.S. Corporate Tax

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Decoding the U.S.
Corporate Tax
Daniel Shaviro
NYU Law School
1
Initial motivation
Usual book impetus for me is public policy (budget deficits,
Social Security reform, transitions, etc.).
Here, initial teaching impetus: for Tax Policy or Corporate Tax,
no concise account of rich & varied economics literature.
Lay understanding & public policy debate need this, too especially given distinctive aspects of corporate taxation.
A “poorly posed problem” given lack of coherent underlying
concepts (corp entity, debt-equity, etc.).
Economists have failed us (lawyers) because we failed first.
2
Further motivation
Corporate integration is fine in theory, but a misallocation of
reform effort? (Especially if done via dividend relief a la
2003.)
Obvious problem: will it ever happen if Bush Administration
couldn’t do it in 2003?
Subtler problems: do globalization, financial innovation, &
political instability make it less worth doing than (a) we long
thought and (b) alternative reforms (such as those focused on
the tax at the entity level)?
3
Overview of the book
Part 1: BASICS
Chapter 1: why the 2-level corporate tax (normative or descriptive
rationales for each piece), the pieces’ poor fit even one accepted
each rationale.
Chapter 2: main distortions beyond work/saving: entity choice, debt
vs. equity, distribute vs. retain earnings, how distribute (dividend vs.
share repurchase).
Each distortion can go either way, & why / if it matters may vary
(poorly defined building blocks, effective electivity).
Chapter 3: “pillars of sand,” such as (a) defining corporate entity
(characteristics -> public trading -> ??), (b) debt vs. equity (laundry
list, preferred stock, contingent & convertible debt, etc.).
4
Overview, cont.
Part 2: ECONOMIC THEORY MEETS THE CORPORATE TAX
Chapter 4: “old Harberger” vs. “new Harberger” on steady-state
corporate tax incidence. “Dog bites man” can be newsworthy after
all; incidence shift from capital to labor?
Chapter 5: old view vs. new view of dividend taxation. New view is
tautologically true under its assumptions, unrelated to governance et
al, relevant even when untrue; degree of truth is endogenous.
Chapter 6: debt-equity tradeoff theory vs. Miller equilibrium. Miller
view ever more relevant in a world with (a) ever-rising effective
electivity and (b) corporate rate likely to fall below top individual rate.
In the Miller view, corporations are simply low-rate tax shelters.
5
From home to abroad
Part 3: THE INTERNATIONAL DIMENSION
Chapter 7: basics of the U.S. outbound rules; once again each piece
has a rationale, but WW and territorial can’t both be right.
Deferral & FTC: leaving aside their effect on the overall tax burden on
outbound investment, these are horrible rules (bad marginal incentive
effects, high compliance / administrative costs).
Chapter 8: lack of clear international tax policy framework given
multiple margins such as those underlying CEN, CIN, CON, etc.
Here we lack not only a map but a compass.
6
International Tax Policy Dilemmas
CEN / WW taxation might well prevail normatively if no entity-level
tax & all resident individuals taxed directly on all investment.
But the vacuity of “corporate residence” tilts the merits considerably
towards CON / territoriality.
E.g., imposing U.S. tax, not on all foreign investment, but solely on that
made by U.S. firms yields clientele effects w/o necessarily advancing
WW locational neutrality.
And there are good theoretical reasons as well as empirical evidence
for doubting that outbound investment by U.S. firms reduces total
U.S. investment, employment levels, etc.
BUT: does this suggest 0 rate on outbound? Note (a) transition, (b)
vacuity of the source concept, (c) tradeoff between distortions. 7
And finally …
Part 4: WHERE IS THE CORPORATE TAX HEADED?
Chapter 9: the emerging brave new world, with 3 especially salient
trends:
1. Ongoing financial innovation – Lots of things may become
increasingly elective (debt vs. equity, publicly traded, payment of
dividend, etc.).
2. Rising worldwide capital mobility – investment increasingly can go
anywhere, though people to a degree still don’t.
3. Possibility of increased U.S. political instability – from increased
party cohesion & ideological divide, plus the long-term fiscal gap
making even “sacred cow” programs potentially unsustainable.
8
Corporate integration
Chapter 10: examines the wide range of integration models,
including flow-through, dividend exemption, imputation,
dividend deduction, CBIT, BEIT.
Broader structural issues pertain to transition, corporate-level tax
preferences, tax-exempt SHs, cross-border issues.
Dividend exemption seems most popular in the U.S. (& note other
countries have moved away from imputation).
But financial innovation turns it into a Miller-style tax rate election, WW
capital mobility may suggest acting at entity level, political instability
may lead to fluctuating dividend rate (undermining new view
efficiencies).
9
Alternative reform scenarios
Chapter 11: other possible new directions for corporate tax.
Proposal 1: significantly lower U.S. corporate rate given WW tax
competition, unclear incidence of the putatively progressive tax.
BUT: (a) U.S. fiscal gap underlines the need for financing, (b) address
regressive transition incidence of unexpected repeal, (c) need to
address Miller-style use of corporation as a tax shelter.
E.g., “reasonable compensation” rules for minimum salary deemed
paid to owner-employees?
BEIT/COCA-style corporate-level deductions and SH-level inclusions?
10
A second direction for reform
Proposal 2: ceasefire-in-place or burden-neutral international tax
simplification / rationalization.
Altshuler-Grubert: burden-neutral repeal of deferral, made so by
reduced U.S. tax rate on outbound investment.
Or, taking it a step further: burden-neutral repeal of deferral AND the
foreign tax credit (converted to deduction but with further rate reduction
to avoid increased tax burden on outbound).
Same as territorial, except the new rate isn’t quite zero.
Raises treaty problems, danger of political instability (repeal credit,
then raise rate), note issues of transfer pricing & transition.
11
A third direction for reform
Proposal 3: address corporate governance problems through the
corporate tax.
As we’ve learned recently, corporate governance is a HUGE problem,
which market institutions have utterly failed to address adequately.
While it’s clearer that something must be done than that the tax system
is a good place to do it, note the rich interactions between tax
sheltering, managerial incentive issues, and earnings management.
My “modest proposal” – halfway book-tax reconciliation, structured to
minimize the biggest downside (Congressional meddling in defining
financial statement income).
Whether one likes this proposal or not, book-tax interactions & the tax
system’s effect on governance need further attention.
12
Where are we headed?
Gloomy scenario: dysfunctional political system undermines any
serious reform, rising effective electivity undermines even desired
taxation of economic activity conducted through corporations ...
… subject, however, to spasmodic poorly-designed short-term
revenue grabs & policy lurches; threatening overhang of fiscal gap.
Hollywood ending: revival of rational policymaking, perhaps featuring
1983-style (Reagan-O’Neill on Social Security) grand bargains.
“If wishes were horses, beggars would ride” – but we certainly can
hope for the cheerier of these alternative futures.
13
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