Stealth Inequity: Using Corporate Integration to Ease Unfairness in the Tax Code
William & Mary Policy Review, Forthcoming
69 Pages Posted: 27 Jan 2011
Date Written: January 26, 2011
This article explores the inequities inherent in the current corporate income tax structure. The author argues that notions of vertical and horizontal equity are violated in the current tax code. In particular, tax payers are taxed differently depending on the type of business entity that they invest in, which violates notions of horizontal equity; and higher income investors are allowed to invest in certain entities with lower tax consequences, that are not available to lower income investors, which violates notions of vertical equity. Hedge funds, partnerships, limited liability companies, and a variety of other business choices are only available to accredited investors who earn high incomes or have a certain amount of wealth. This makes the double tax on corporations unfair from both a vertical and a horizontal equity standpoint. Various approaches to alleviating the double tax and inequitable tax burden are introduced and analyzed including complete integration proposals which would eliminate the corporate income tax at the corporate level and partial integration proposals which, in some circumstances, would allow for dividend deductions at the shareholder level. Proposals face various criticisms including administrability concerns, loss of revenue and allowing certain tax-exempt and foreign investors to escape any sort of taxation on their earnings. The author explores each of these criticisms and introduces her own integration proposal which seeks to alleviate equity and fairness objections to the current corporate income tax structure while keeping in mind the present concerns over integration which includes a deduction for dividends and proposes to tax all income from any type of investment at the investor’s personal ordinary income tax rate.
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