Corporate Capital and Labor Stuffing in the New Tax Rate Environment

71 Pages Posted: 26 Mar 2013

Date Written: March 21, 2013


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.

Suggested Citation

Kleinbard, Edward D., Corporate Capital and Labor Stuffing in the New Tax Rate Environment (March 21, 2013). USC CLEO Research Paper No. C13-5; USC Law Legal Studies Paper No. 13-5. Available at SSRN:

Edward D. Kleinbard (Contact Author)

USC Gould School of Law ( email )

699 Exposition Boulevard
Los Angeles, CA 90089
United States

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics