Subject: Dividends paid deduction and offsets Comment: Ladies and Gentlemen: Subject: Dividends Paid Deduction Proposal While I am the Vice President, Tax for a multinational corporation, I am submitting this comment in my individual capacity. The current U.S. corporate tax system has multiple significant drawbacks. First, it puts U.S. owned corporations at a disadvantage relative to their foreign owned competitors. Companies subject to participation exemption regimes or other territorial tax systems can pay little or no tax on their foreign source income, whereas U.S. corporations ultimately bear a full 35% liability. This difference drives the tendency for foreign corporations to acquire U.S. companies and eliminate their U.S. based headquarters, at a great cost in high quality American jobs. Second, the U.S. system drives a great waste of intellectual resources. Thousands of highly intelligent individuals spend their days wrangling over issues that, at the end of the day, contribute nothing to the gross national product. Third, the system does nothing to promote social equity. The burden of corporate tax falls partly on consumers, partly on employees, and partly on shareholders, including the millions of middle class Americans who hold shares through their IRAs, mutual funds and pension funds. A corporation does not consume, and does not enjoy the benefits of wealth. It is merely a conduit, and the taxes nominally imposed upon it ultimately fall upon human beings. If we believe in a progressive tax system, then we should seek to tax those human beings directly in a rational manner, not through the hidden and possibly regressive conduit of a corporation. Direct abolition of corporate tax, however, would create a major problem. Wealthy individuals would place their funds in corporate solution as a means to avoid paying their fair share of tax. However, this problem can be avoided by keeping the current corporate tax system in place, but implementing a 100% dividends paid deduction. Ultimately, as a corporation paid out its earnings it would end up paying no corporate tax. However, wealthy individuals would not be able to obtain a deferral benefit by placing their assets in corporate form. Further, the efficiency of our economy would be increased. Currently corporations have a strong tendency to retain their funds and invest them in their existing businesses, even where those businesses are already overcapitalized. Because a dividends paid deduction would give corporations an incentive to pay out their excess earnings to their shareholders, it would increase the likelihood that the funds would be reinvested in the most promising sectors of the economy. A dividends paid deduction would initially reduce tax revenues, of course. However, there would be a couple of natural offsets to this effect. First, the dividend recipients (aside from retirement funds) would pay tax on the distributions. Second, the effective abolition of U.S. corporate tax would provide heavy encouragement for every multinational in the world to move offices and income to the U.S. The resulting increase in high quality U.S. jobs would significantly increase individual income tax revenues. I would further suggest certain other offsets to make up the revenue loss. First, the effective abolition of corporation level taxation would make it unnecessary to have special tax rates for dividend income or for capital gains on shares. Those special rates should be abolished. This would materially improve tax equity. Under the current system, wealthy individuals tend to receive favorably taxed dividend and capital gain income, since they can afford substantial direct investments. Working people, on the other hand, tend to invest through pensions, IRAs, and mutual funds where they do not get the benefit of these breaks. The dividends paid deduction would necessarily lead to increases in stock prices, which would benefit all shareholders without regard to the form of their ownership. Second, the step-up in basis at death should be eliminated for shares. Stock has a readily or at least reasonably ascertainable market value, so there is no reason to permit the step-up for shares. These simple reforms would have an extremely positive impact on our economy, while adding no more than a page to the Internal Revenue Code. While it would reduce my value as a professional if the corporate tax was effectively abolished, the benefits to America are so clearly apparent that I nonetheless felt compelled to offer this suggestion. Thank you for your attention. Sincerely yours, Matthew A. Lykken |