Corporate Capital and Labor Stuffing in the New Tax Rate Environment
Edward D. Kleinbard
USC Gould School of Law
March 21, 2013
USC CLEO Research Paper No. C13-5
USC Law Legal Studies Paper No. 13-5
Federal tax legislation enacted on January 2, 2013 to resolve the “fiscal cliff” policy controversy has reintroduced substantially higher maximum individual income tax rates on ordinary income, but has retained the 2003-2012 innovation of taxing dividend income at the same relatively low rate as long-term capital gains. At the same time, corporate tax reform is likely to lead to a substantially lower statutory corporate tax rate than current law’s 35 percent. The combination of these three factors will in the near future usher in the return, for the first time in a generation, of the taxable corporation as a personal tax shelter for owners of closely-held businesses.
This paper assumes that corporate headline rates in fact are lowered, and analyzes an individual’s incentives in that new tax rate environment to retain corporate earnings not strictly needed to support business operations (or to inject new investment capital into the corporation), rather than to extract that capital and earn the same income through direct investment (“capital stuffing”), and to understate the labor income of corporate owner-managers, so as to treat a disproportionate amount of their income as capital income, in the form of corporate retained earnings (“labor stuffing”). To aid in that analysis, the paper offers a new mode of conceptualizing the time value of deferring a tax liability. Finally, the paper analyzes current law’s tools to combat capital and labor income stuffing, and finds them wholly inadequate to the task.
Number of Pages in PDF File: 71
Date posted: March 26, 2013
© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo8 in 0.266 seconds