Now the proposal looks even better than before, because it reduces some of the finagling problems of companies trying to turn everything into dividends. It also eliminates the bias against high-growth companies that previously seemed to be inherent in favoring dividends over capital gains. I sense that some of the career Treasury people have been thinking about such things for a long time and pulled this out of a file drawer, although of course it's just speculation.

It also brings taxation of regular (C) corporations into line with that of all other business entities -- S corporations, partnerships, limited liability companies, proprietorships, etc. -- which collectively receive half the business income in the US.

There's no good reason why one form of business entity (and half of all business income) should be taxed more heavily than all the rest. Especially when a million or more C corporations exist solely as the result of historical contingency, because the other options weren't available when they were formed, and are locked into that status and the higher tax burden because the tax code effectively precludes them from switching.

Almost nobody forms a new business as a C corp anymore because of the competitive disadvantage that results from the double taxation, and the advantage that comes against incumbent C corps from not being one. Maybe after this C corps will gain in popularity again. Equity is a good thing.

It is true that this is less-distorting than
just making dividends tax-free, but it is certainly going to further complicate the tax code--filing schedules B and D should be quite
an adventure.

What I don't understand is that once they do this,
what is the point of corporate taxation at all?
It would be easier and more equitable to just
eliminate the corporate tax. Probably it would
be wise to raise the capital gains tax a bit as
an offset.

I might add as a footnote that while most of the talk of the dividend deduction seems to have taken place with images of dividend checks being delivered in the mail from the Fortune 500 to economic rentiers in mind, in fact we're talking about 2.2 million C corps here -- 99% of which are small private or family businesses (after all there, are only 500 in the S&P 500 and 5,000 in the Wilshsire 5000, and the last of those aren't very big.)

I don't know how the dividends these pay have been included in the quick calculations of how this change will play along the income distribution, or if they have been included at all.

Of course, it may not make much difference. Owners of fairly successful small private businesses definitely generally count among "the rich" in those income distribution tables that always get printed. Though if one considers what goes into building a successful small business and keeping it so, rentiers they generally ain't.

What will this mean for state governments. Will they also have to reduce the taxes on corporations. What about municipal bonds? Will states have to raise the interest rates on bonds in good times.

What will become of the system of incentives for companies to move to certain or remain in certain locations?

"It also brings taxation of regular (C) corporations into line with that of all other business entities -- S corporations, partnerships, limited liability companies, proprietorships, etc. -- which collectively receive half the business income in the US."

It seems to me that it doesn't put C Corps in line at all, it puts them at an advantage. I own an S Corp and my "dividends" (any profits the company makes) are taxed at my personal rate. Why shouldn't I switch my status to a C Corp and pay myself tax free dividends? Indeed, I could probably get away with paying myself less in salary and avoid some employment taxes, since S Corps are scrutinized to make sure that owner/employees don't cheat the employment tax system and, to my knowledge, C Corps are not?

I can't see why this won't dramatically alter the form of incorporation for a small business owner.

It would be nice if some of our brilliant economic journalists would see fit to explain to the masses that this is, in essence, a backdoor repeal of the corporate income tax, not a dividend tax cut for "de ol' folks at home."

The Bush plan will result in Capital paying less taxes, and that is its only purpose. That the haves-more get more and the haves-less get less is the primary function of the Republican Party. Thanks again, Ralph!

>> It seems to me that it doesn't put C Corps in line at all, it puts them at an advantage. <<

It puts them "in line" in that taxed retained earnings are added to basis, as with other entities. It obviously doesn't put them in line as to the method of income tax that applies, as earnings of C corps remain taxed at the corporate rate while earnings of other entities are taxed at the owners' personal rates.

As for this putting C corps "at an advantage", well, it depends on the tax rate of the corporation versus that of the owner -- but
probably not.

For income from $75k to $335k a C corp's marginal rate is always higher than an individual would pay -- from $100k to $335k it is 39%, which is almost one-third more than an individual would pay for much of that range. Also, C corps get no tax break for capital gains as individuals do, they pay the full rate.

Moreover, S corp owners (and LLC and partnership owners) can spread shares around to low-tax bracket family members, like children over age 13, so business income is shifted into even lower tax brackets (like 0% or 10%) -- a very popular strategy. C corps can't do that.

So generally speaking, private C corps are still going to be at a disadvantage to S corps income tax wise, though mileage may vary by the specific situation.

>> I could probably get away with paying myself less in salary and avoid some employment taxes, since S Corps are scrutinized to make sure that owner/employees don't cheat the employment tax system and, to my knowledge, C Corps are not? <<

C corp owners receive a lot more scrutiny from the IRS as to whether they are taking "reasonable compensation" than do S corp owners, as audit statistics will verify. Though they get examined to make sure they aren't taking too much salary, to turn earnings into a deductible business expense to avoid the double tax on them, an issue that would become moot if this law change actually gets through. S corp owners get audited to make sure they aren't taking too little salary to avoid employment taxes -- but as that applies only when income is under about $80k, that's not a big-money priority issue to the IRS (compared to C corp owners who take a million dollars in salary). The law change would put owners of both types of corps on more equal ground this way too.

>> this is, in essence, a backdoor repeal of the corporate income tax, <<

Not at all. The corporate income tax remains in all its glory, very different from the individual income tax. It is a repeal of the application of the individual income tax to income that has already been subject to the corporate income tax.

"The Bush plan will result in Capital paying less taxes, and that is its only purpose. That the haves-more get more and the haves-less get less is the primary function of the Republican Party."

Just so. Enrich the rich at the expense of the middle class and poor....

Bernard -- There's a rough equivalence, but most of your retirement account investments will occur in your peak earning years, most of your distributions will occur in [lower bracket] retirement years.

Steuerle noted that dividend paying stocks held in retirement accounts might be relatively disadvantaged compared to same stocks held outside such accounts, and he oughta know ... but we're all trying to figure this out.

Dividend paying stocks held in retirement accounts WILL be disadvantaged compared to those held outside. Remember a million dollars in S&P shares yields about 17,000 dollars in dividends. That 17,000 will be taxed at income levels if taken from a retirement account and tax free otherwise. Good grief.

This is a tax bill that the rich should love and the rest should fear.

If a corporation is "a person under law" as I am constantly being told, shouldn't that "person under law" be taxed like every other person? My pension and soc sec is taxed and the money I spend for a variety of things is taxed why am I not granted an exemption?

Here is an interesting argument I just read.
Given that the dividend tax cut goes to owners of stock and makes many problems for the Muni bond market and such, wouldn't it make more sense to cut the corporate part of the dividend Tax. Some people object that this would be seen by the other party in the usual class war fare way but actually it seems that it might generate jobs for some people.

>>Dividend paying stocks held in retirement accounts WILL be disadvantaged compared to those held outside.<<

So put 'em in a Roth IRA and they won't be. Simple.

>> Remember a million dollars in S&P shares yields about 17,000 dollars in dividends. That 17,000 will be taxed at income levels if taken from a retirement account and tax free otherwise. Good grief. <<

You haven't noticed that capital gains are taxed at ordinarly income rates if held in a retirement account? And that capital losses aren't deductible if held in a retirement accout? Both of which right now cost people who own stocks in retirement accounts a *lot* more than this dividend proposal would. Or you have noticed and haven't complained about it? Good grief.

That's why one may consider putting the income-producing elements of one's savings in a retirement account, and keeping the equity investments outside. Portfolio management.

The last comment by Jim Glass has some misleading
elements. First, many people who have money in retirement accounts don't have significant other investments, so are unable to engage in"portfolio management" in the sense he suggests.

Second, losses in retirement accounts are not "deductible", but since you can't withdraw money you have lost, you won't pay taxes on it, and the money you put into the account was already "deducted" when you contibuted it. That isn't true if it is a Roth IRA, but then the withdrawals aren't taxed at all, so I don't think
that is what he was referring to.

Thanks Matt!

This is a tax cut only a Jimbo could defend and the defensive is absurd. Happily, we do not need portfolio advice from Jimbo.

>>losses in retirement accounts are not "deductible", but since you can't withdraw money you have lost, you won't pay taxes on it <<

Of course, you do pay income taxes on all you withdraw at ordinary rates, even if your losses leave you withdrawing less than you put in.

>>Happily, we do not need portfolio advice from Jimbo.<<

As long as you're happy paying ordinary rates on capital gains. ;-)