The Architecture of Compromise: Why CFOs Might Endorse a 100% Corporate Profit Tax, Repatriate Overseas Profits, Increase Dividends, and Reinvigorate U.S. Equity Capital Market Activity
21 Pages Posted: 16 Aug 2011 Last revised: 9 Oct 2017
Date Written: August 15, 2011
This brief essay explores modes of compromise and how novel approaches can resolve an impasse. The debate on U.S. corporate tax policy is used as an example.
Attempts by bitterly divided parties to compromise on ideological issues by “splitting the difference” can prove a fruitless exercise. That has certainly been the case with regard to U.S. federal tax policy in general and, specifically, with respect to the 9.0% of federal revenues derived from taxation of corporate profits. Some parties are inextricably committed to taxing corporate profits more heavily. Others are equally devoted to reducing the corporate profit tax burden. Efforts to have the parties “split the difference” have at best wrestled effective tax rates marginally up or down from time to time. For years, a stalemate unsatisfactory to all has festered.
We observe that, when dealing with irreconcilably opposed parties, a compromise that “bridges the gap” holds more promise for progress than one that “splits the difference”. As applied to the U.S. corporate tax rate debate, lashing together proposals to i) raise the federal corporate tax rate to 100% and ii) allow 100% corporate deductibility of dividend payments might span the divide between those who call for higher corporate tax rates and those who call for lower ones. In a way, each side gets 100% of what it wants. A static analysis indicates such a package would increase corporate tax revenue to the federal government by 146.9%; a dynamic analysis indicates it would cut corporate tax revenue to the federal government by 53.1% but bring a host of important, secondary benefits some of which would result in substantial, additional federal tax revenues. Secondary benefits that might reasonably be foreseen include:
• A decline in corporate stock buyback activity • Repatriation of overseas profits • Sharply higher U.S. equity capital markets financing activity • Higher after tax return on equity capital for U.S. investors • Improved governance through discouragement of corporate empire building.
Keywords: double taxation, dividend, deductibility, tax deductibility of dividends, corporate tax, Trump, Trump tax plan
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