Tax-Law Expert Demystifies the 100-Year-Old Corporate Tax

Contact: Elizabeth Cronen, (202) 261-5723, ecronen@urban.org

WASHINGTON, D.C., February 13, 2008—The U.S. corporate tax has been in effect longer than the current individual income tax but it has only rarely changed significantly since its 1909 inception. Daniel N. Shaviro, in the new book Decoding the U.S. Corporate Tax, outlines longstanding imperfections in the tax code and describes difficulties in applying corporate tax laws now that financial instruments are so complex and capital flows are worldwide. Shaviro also explains how political and economic realities are likely to frustrate much-needed changes to the tax code.

Shaviro describes tax code features that lead to inconsistent taxation of similar entities and financial instruments.  The tax code often favors either partnerships or corporations, debt investment or equity investment, retaining earnings or distributing them. Whichever way they lie, the biases distort decisionmaking and create inefficiencies in the economy.  

Remedying these arbitrary distinctions in the tax code is especially difficult, Shaviro explains, because the underlying concepts—such as the legal and economic definitions of a corporation versus a partnership, or debt versus equity—often are unclear or functionally meaningless.

"Given the murkiness of its landmark concepts," the author writes, "one cannot easily discern what [domestic corporate tax policy] actually does or how changing its rules would play out on the ground."

Modern financial innovation further complicates matters. Such exotic new financial instruments as contingent convertible debt and credit default swaps, for instance, have significantly blurred the already hazy line between debt and equity, says Shaviro. Increasingly, taxpayers can simply elect whatever tax treatment they prefer, potentially making the current corporate tax unworkable.

Modern global capital mobility also challenges the U.S. corporate tax system. The United States competes with other countries over where to locate business investment and over whose resident corporations will attract investment capital from around the world. Shaviro sizes up the system for taxing U.S. corporate earnings and investment abroad—a combination of a comparatively high tax rate and a deferral of taxes until profits are realized in the United States—and calls it an "almost canonically bad" system. He acknowledges the shortcomings of the two clearest alternatives: a completely "worldwide" system, in which the United States would immediately tax all income earned by U.S. companies directly or through their foreign subsidiaries, or a purely "territorial" system, through which only income produced here, whether earned by U.S. or foreign corporations, would be subject to U.S. corporate taxes. Despite drawbacks, Shaviro avers, either of these extremes is simpler and more rational than the current hybrid.  He asserts that a logical, streamlined tax code, along with reforms lowering corporate rates without reducing revenue, would improve the U.S. economy and boost long-term revenue.

Decoding the U.S. Corporate Tax considers many possible corrections to imperfections in the tax code. Shaviro argues that corporate integration—eliminating the double taxation that happens when corporate income is taxed at both the company and shareholder levels—is appealing in theory but unlikely to work well in practice. Far better, Shaviro finds, would be reducing the corporate tax rate, closing loopholes that would allow individuals to pay taxes at the reduced corporate rate, and simplifying international tax rules.

Shaviro's in-depth examination of key conceptual issues raised by the corporate tax are as cogent and valuable as his proposed solutions. Corporate tax law is intricate, and its foundational principles often lack clear meanings. As policymakers and legal experts try to revise the U.S. tax system, Decoding the U.S. Corporate Tax provides a vital roadmap.

Shaviro, the Wayne Perry Professor of Taxation at New York University School of Law, is among the nation's leading legal scholars on tax policy. Before entering academia, he spent three years in private practice at Caplin & Drysdale, a leading tax specialty firm, and three years as legislation attorney at the Joint Congressional Committee on Taxation, where he worked extensively on the Tax Reform Act of 1986.

Decoding the U.S. Corporate Tax is available from the Urban Institute Press (paper, 6"x9", 220 pages, ISBN 978-0-87766-757-5, $26.50). Order online at http://www.uipress.org, call 410-516-6956, or dial 1-800-537-5487 toll-free. Read more, including the introductory chapter, at http://www.urban.org/books/uscorporatetax/.

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