NCPA - National Center for Policy Analysis

Corporate Integration Would Eliminate Double Taxation and Encourage Investment and Economic Growth

February 27, 2015

The United States has a modified version of classical corporate tax system, which places a double-tax on corporate income with one tax at the corporate level through the corporate income tax and a second tax at the individual level through the individual income tax on dividends and capital gains.

The two layers of tax create a significant tax burden on corporate income. No matter how the corporation distributes its after-tax profits as a dividend or retains it, the integrated corporate tax rate in the United States is high compared to other developed countries. The United States\' integrated tax rate on corporate profits (56.6 percent) and on capital gains (56.6 percent) are both the second highest in the OECD.

The double taxation of corporate earnings creates several economic distortions that have real effects on both business decisions and the overall economy. It reduces saving and investment, shifts traditional C corporations to non-corporate business forms, and encourages corporations to use debt financing more than equity financing.

Integrating the individual and corporate tax code would lower the combined burden on corporate income and eliminate many of biases in the current system. There are several ways to integrate the corporate tax code.

  • Corporate income can be fully taxed at the entity level (a corporate income tax) and then tax exempt when passed to shareholders as dividend income, or corporations could be given a deduction for dividends passed to their shareholders, who pay tax on the dividend income. Six OECD countries (Estonia, Slovak Republic, Finland, France, Luxembourg, and Turkey) have full or partial dividend exemptions.
  • Shareholders and corporations both pay tax on their income, but shareholders can acquire a credit to offset taxes the corporation has previously paid. Seven OECD countries (Australia, Canada, Chile, Mexico, New Zealand, Korea, and United Kingdom) have full or partial credit imputation systems.

Integrating the corporate and individual income tax could ensure that corporate income is only taxed once and would increase the incentive to invest and reduce the incentive to avoid the second layer of tax. This would eliminate the current biases in the tax code and encourage investment and economic growth.

Source: Kyle Pomerleau, "Elimination Double Taxation through Corporate Integration," Tax Foundation, February 23, 2015.

 

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