Tax Analysts Blog

Growing Interest in Trading Rate Hike on Capital Gains for Corporate Rate Cut

Posted on Sep 18, 2012

In today's Financial Times former Clinton economic advisor Laura D'Andrea Tyson made the case for lowering corporate tax rates and paying for those rate cuts by raising the current 15-percent rate on capital gains (instead of broadening the corporate tax base). "A more efficient and progressive way to pay for a lower corporate tax rate would be to increase taxes on dividends and capital gains," she writes.

This echoes the sentiments expressed by Columbia Law Professor Michael Graetz to the Senate Finance Committee in 2011. In his testimony Graetz reversed the view he had when he was a Treasury official advocating for relief from double taxation of corporate profits at the individual level: "I will not insist here that we were right when the Treasury report was issued, but even if we were right then, that policy is now wrong. It is far easier and, I believe now better tax policy, to collect income taxes from individual citizens and resident shareholders than from multinational business enterprises."

And a similar view can be found in a 2010 paper by economists at the Brooking-Urban Tax Policy Center: "A shift in taxes on corporate equity income from the corporate to the shareholder level could increase the attractiveness of the United States as an investment location and make the tax system more progressive," the authors' concluded. (Rosanne Altshuler, Benjamin Harris, and Eric Toder, "Capital Income Taxation and Progressivity in a Global Economy," Tax Policy Center (May 12, 2010).

This is not all just theory. In the United Kingdom the Conservative-led coalition government raised the rate on capital gains from 18 to 28 percent in 2012. This helped to pay for its phased-in reduction of the corporate rate to 22 percent (in April 2014).

The Senate Committee on Finance and the House Committee on Ways and Means have scheduled a public hearing on “Tax Reform and the Tax Treatment of Capital Gains” for Thursday September 20, 2012. It will be interesting to see if the hearing participants raise the possibility of trading capital gain hikes for corporate rate cuts.

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