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News of U.S. Corporate Integration's Death 'Greatly Exaggerated'

Posted on February 21, 2017 by Andrew Velarde

A Senate corporate integration proposal is still very much alive and its release may only be awaiting a broader reform proposal for it to accompany, U.S. Senate Finance Committee Chief Tax Counsel Mark Prater said February 17.

"The news of its death is greatly exaggerated," Prater said, speaking at a conference in Washington sponsored by the Tax Council Policy Institute. "If you've got elements of the corporate income tax in place, it's a tool we could use on a revenue-neutral [and] distribution-neutral basis. It's there and we're excited about having the opportunities to use it," he said, explaining that while the plan is self-contained, if it were to be deployed, it would be done so in conjunction with a larger reform plan.

In recent months, discussion of tax reform has been dominated by the House's "A Better Way" tax reform blueprint and its border adjustment tax. But Senate Finance Committee Chair Orrin G. Hatch, R-Utah, has been contemplating a reform proposal built around corporate integration for more than a year. The proposal, which has not yet been released publicly, is revenue neutral under conventional scoring conducted by the Joint Committee on Taxation, according to Prater. The revenue stream also does not decline in "out years," Prater added. 

While full details of the integration plan are still lacking, it would reportedly use a dividends paid deduction to allow corporate income to be taxed only once. The plan may also include a nonrefundable withholding tax rate of 35 percent on both interest payments and dividends. 

"On a distributional basis . . . if you are worried about the shifting of tax between various income cohorts, it keeps that distribution burden intact and actually makes it slightly more progressive in some features," Prater said. He added that the plan had been scored to "pick up good movement" on investment and capital. The estimate also assumes that there will be a significant amount of unlocking of earnings from controlled foreign corporations back to domestic firms, Prater argued. It assumes a prospective effective date, he said, leaving proposals on repatriation of accumulated profits open for discussion. The plan's treatment of interest also lends it an anti-base-erosion effect.

When the Senate Finance Committee held a hearing on corporate integration in May 2016, concerns from Democrats over ramifications the plan might have for tax-exempt accounts, specifically retirement plans, dominated the discussion. Committee ranking minority member Ron Wyden, D-Ore., worried about dividends and interest payments that go to retirement plans suddenly facing taxes for the first time, because their tax-deferred status might be affected.

That effect is of no small concern. According to an estimate from the Urban-Brookings Tax Policy Center, the share of corporate equity held in taxable accounts fell from 83.6 percent in 1965 to 24.2 percent in 2015, with ownership being displaced by foreigners and nontaxable retirement accounts. 

But Prater noted February 17 that there are features in the plan that can deal with concerns surrounding retirement plans, which he said "were rightly raised." Asked by Tax Analysts to elaborate on this point after the panel, he said only that the proposal had "dials built into it that can be turned."

Prater argued that there was a significant amount of agreement from the Senate on the House blueprint, though he acknowledged the provision on border adjustment was raising some concerns.

On February 8 Sen. David Perdue, R-Ga., sent a letter to his colleagues expressing opposition to the House's proposal. He called the 20 percent border adjustment tax on imports regressive because it could result in an increase in consumer prices. If instead currency revaluation were to occur that might avoid this increase, the tax would "trigger a multi-trillion dollar reduction in the value of foreign investments held by U.S. investors, including many pension funds and retirees," Perdue argued.

Some Republican House members have demonstrated skepticism of the border provision, as well. House Ways and Means Committee member Mike Kelly, R-Pa., said February 14 he was "not thrilled" about the provision.