Between Scylla and Charybdis: Taxing Corporations or Shareholders (or Both)

66 Pages Posted: 3 Jun 2016 Last revised: 3 Dec 2016

Date Written: Nov 1, 2016


The US taxes both corporations and shareholders on corporate profits. In principle, the U.S. could rely on only one of these taxes, as many commentators have suggested. Although choosing to tax the corporation or its owners may seem like taking money from one pocket or the other, this Essay emphasizes a key difference: corporate and shareholder taxes prompt different tax planning. Relying on one or the other mitigates some distortions and leaks, while exacerbating others. As a result, choosing which tax to impose is like navigating between Scylla and Charybdis.

In response to these dualing distortions, this Essay recommends using both taxes. Some tax should be collected from corporations, and some from investors. The two rates should be coordinated, so they aggregate to the combined rate Congress wants, which ideally would be the rate for pass-through businesses. The main goal of this Essay is to defend the use of both taxes, and to analyze what the balance should be between them. Using both taxes has three advantages. First, if one of these partially overlapping instruments is avoided, the other still raises some revenue. Second, if the goal is to deter a planning strategy, cutting the rate to zero is an overreaction. If the rate is low enough, paying a tax is cheaper than avoiding it, since tax planning is not free. Third, if one tax is cut instead of repealed, the other can be correspondingly lower, and thus induces less planning.

Even so, using two taxes poses challenges as well. First, although the taxes are supposed to backstop each other, they cannot do so when a planning strategy avoids both. Second, using two taxes is likely to increase administrative costs. Third, coordinating the two taxes to produce the right combined rate – ideally the rate for noncorporate businesses – is not easy.

Once Congress chooses the combined rate on corporate profits, how should this burden be allocated between corporate and shareholder taxes? Since the corporate tax probably is more distortive, it should be cut significantly. The shareholder tax should be increased to make up the difference (or at least some of it).

This Essay also cavasses reforms to shore up corporate and shareholder taxes, so the combined rate that actually is collected comes closer to the one on the books. While the focus is on incremental reform, this Essay’s central recommendation extends to more ambitious reforms as well. They also benefit from using two taxes, instead of one.

Suggested Citation

Schizer, David M., Between Scylla and Charybdis: Taxing Corporations or Shareholders (or Both) (Nov 1, 2016). Columbia Law and Economics Working Paper No. 536, Available at SSRN: or

David M. Schizer (Contact Author)

Columbia University - Law School ( email )

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