Capital Income Taxation and Progressivity in a Global Economy

Preprint OPEN
Rosanne Altshuler ; Benjamin Harris ; Eric Toder (2011)
  • Subject: corporate taxation, individual taxation
    • jel: jel:H20 | jel:H25 | jel:H24

The increase in international capital mobility over the past two decades has put pressure on the tax treatment of corporate equity income. Corporate-level taxes distort investment flows across locations and create opportunities for tax avoidance by shifting income across jurisdictions. Outward flows of capital shift part of the burden of the corporate-level tax on equity income from capital to labor, thereby making its incidence less progressive. Individual-level taxes on corporate equity income lower the after-tax return to savings but have less distorting effects on investment location and are more likely to fall on owners of capital than workers. This logic suggests there may be both efficiency gains and increases in progressivity from shifting taxes on corporate equity income from the corporate to the shareholder level. We estimate the distributional effects of a tax reform that raises shareholder-level taxes on corporate equity income and uses the revenue to cut the corporate tax rate. We find that taxing capital gains and dividends as ordinary income (subject to a maximum 28% rate on long-term capital gains) would finance a cut in the corporate tax rate from 35% to about 26%, assuming no behavioral response. While the distributional effect depends on what one assumes about the incidence of the corporate income tax, our results suggest that even if the corporate income tax were paid entirely by capital income, the reform would make the tax system more progressive.
  • References (27)
    27 references, page 1 of 3

    WHO PAYS THE CORPORATE INCOME TAX? ........................... 360

    A. Open Economy Incidence in General Equilibrium Models.................................................................................... 362

    B. Empirical Incidence Analysis .............................................. 366

    C. Other Considerations............................................................ 369

    III. EFFECTS OF A TAX SHIFT FROM THE CORPORATE TO THE INDIVIDUAL LEVEL...................................................................... 370 A. Distributional Effects............................................................ 370 B. Behavioral Responses and Revenue.................................... 372

    IV. SIMULATIONS AND METHODOLOGY ......................................... 374 A. Simulations ............................................................................ 374 B. Methodology.......................................................................... 375 15 See William Randolph, International Burdens of the Corporate Income Tax 5

    (Congressional Budget Office, Working Paper 2006-09, August 2006), available at

    http://www.cbo.gov/ftpdocs/75xx/doc7503/2006-09.pdf. 22 This section borrows heavily from Benjamin Harris, Corporate Tax Incidence

    Paper, November 2009), available at http://www.urban.org/UploadedPDF/1001349_

    corporate_tax_incidence.pdf. 23 See, e.g., Kevin Hassett & Aparna Mathur, Taxes and Wages 9, 10 (Am.

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