I Come Not to Praise the Corporate Income Tax, But to Save it
Posted: 30 Jan 2003
President Bush has proposed a complete exclusion of dividends from taxable income, as well as an accompanying basis adjustment to reflect undistributed corporate income. Such reform, if enacted, would end the era of double taxation. Is this necessarily a good thing? Since double taxation of a portion of entity-generated income has for so long been the norm, is it possible that it reflects some sound policy? If so, what is that policy? This article examines some possible justifications for double taxation, and finds they do not explain the structure of the current corporate income tax. Nonetheless, it argues, the problem is not with the concept of double taxation itself; it is with its implementation in the current corporate income tax regime. In light of this conclusion, the article proposes the adoption of a specific justification for double taxation, and then shows what a tax based on such justification would look like. The resulting "entity income tax" imposes an entity-level tax on all returns that "participants" in any entity reap by virtue of their participation in the entity. Thus, the entity income tax can be viewed as an extension of the current corporate income tax to entities other than corporations and to participants other than shareholders.
Keywords: Corporate, income, tax, policy
JEL Classification: K00, K34
Suggested Citation: Suggested Citation