CORPORATE TAX reform continues to be a work in progress for the Trump administration and the Republican Congress, where a controversial House plan to slash the top business rate and pay for it, or most of it, with what amounts to a tax on imports remains the leading proposal. The latest development was a remark Friday by President Trump’s top economic adviser, Gary Cohn, that “we are working on a bunch of really interesting ideas” to produce revenue-neutral reform — i.e., one that does not increase the budget deficit — over a 10-year period.
The revenue-neutral part sounds good; a welcome reassurance, in fact, compared with previous administration waffling about fiscal responsibility. As for “really interesting ideas,” we hope Mr. Cohn is at least considering the innovative corporate-tax-reform plan by Alan Viard of the American Enterprise Institute and Eric Toder of the Urban Institute, which would substantially cut the corporate tax rate, offset by higher taxes on dividends and capital gains for individuals.
Specifically, the top corporate rate would fall from 35 percent to 15 percent, while shareholders in public companies would pay the same rate on dividends and capital gains as they pay on their ordinary income, as opposed to the current system’s preferential rate. Crucially, individuals would be taxed not just when they sold stocks, but on any annual increase in the market value of their holdings. Meanwhile, nonprofits and retirement plans would pay a new 15 percent tax on interest earned, to offset the bump in stock value they’d get due to the lower 15 percent corporate rate. Owners of firms that do not issue publicly traded stock — partnerships and the like — would pay the ordinary income rate on their share of profits.
The Viard-Toder plan overcomes the biggest problem of the current corporate taxation system: It encourages companies to move overseas, either in actuality or in the sense of locating profits abroad. A low 15 percent rate would not only encourage American firms to stay home, but induce non-American companies to relocate. The plan also takes advantage of the paradox that individuals are easier to tax than even the biggest corporate entity since, unlike the latter, they can’t relocate on paper to Ireland. Subjecting more of the wealth and income that individuals realize from corporate ownership to taxation, at the same rate as wage income, is thus efficient and, in a real sense, fair, since the current preferential rate for capital gains is a major reason that billionaires can get away with paying lower tax rates than their secretaries.
Operationally, the biggest difficulty would be quantifying and taxing the annual fluctuations in investors’ stock holdings. That will be a heavy lift politically, too; nonprofits as well can be expected to howl at the tax on their interest earnings. It’s important to note, however, that the total burden of taxation on corporate income would remain roughly the same; it would simply be levied directly on the company’s owners rather than on the (elusive) legal entity itself. As someone once said, corporations are people. To which the Viard-Toder plan adds a corollary: Tax them accordingly.