Corporate Tax Integration: A Quantitative Comparison of Alternatives
Government Finance Brief No. 28
Executive Summary This paper explains how the dividend credit method of integration would operate and presents quantitative estimates of the impact of alternative forms of integration. The total tax change and its distribution by income class are given at 1978 levels.
One possible form of integration, a 30 percent dividend received credit, would reduce the tax on corporate source income by $6.8 billion. This would lower the average effective tax rate on corporate source income, including the corporation tax and the subsequent personal tax on dividends and capital gains, from the current 47 percent to 43 percent. The tax on corporate source income would be cut by 18 percent for low income shareholders (with AGI of $5,000 to $10,000); this reduction would gradually decline to a cut of 6 percent for shareholders with incomes over $500,000.
The basic quantitative estimates indicate the following six conclusions.
(1) The likely forms of integration would raise the return to equity investors and encourage equity investment.
(2) A 30 percent dividend received credit would reduce the tax on corporate source income by approximately the same amount as a reduction in the corporate tax rate from 48 to 43 percent.
(3) Some forms of integration could actually raise the effective tax on corporate source income; it is important to evaluate each proposal separately.
(4) The effect of any dividend credit plan depends substantially on how firms respond in adjusting their dividends.
(5) The impact of integration depends on what other changes in the tax law are made at the same time.
(6) In evaluating the impact of any change, it is important to examine the full tax effect including the implied tax on accruing capital gains and not just the immediate impact on tax collections.