The Zen of Corporate Capital Structure Neutrality

Given the current tax rate structure - where the marginal tax rate of some persons exceeds the corporate tax rate and the marginal tax rate of others is exceeded by it - corporations are generally well advised to employ both debt and equity in their capital structures. The former will be held by low tax rate taxpayers and will serve to lower the effective aggregate tax rate6 on the corporation\u27s taxable income. The latter will be held by high tax rate taxpayers and will serve to keep low the effective aggregate tax rate on the corporation\u27s unrecognized economic income (such as any increase in the value of corporate assets, including goodwill). From the vantage of the Fisc, this is, of course, the worst of all possible worlds. This Article does not propose to do away with the infirmities of the current corporate tax regime by abolishing double taxation. For while Code § 11 may be the step child of federal income tax theory, there currently appears to be no realistic prospect to repeal it. At least in the case of publicly traded corporations - the most important class of double-taxed entities - Americans tend to view them either as a free good, which can be taxed with economic impunity, or as a proxy for the faceless rich, who are undertaxed in any event. Perhaps this will change in time, as the proliferation of 401(K) plans turns the hoards of middle class taxpayers into capitalists. But a change seems to be yet a good way off. And in any event, as I argue below, integration - at least in its commonly proposed forms - would not necessarily cure all that ails the current corporate tax system. Thus, this Article takes double taxation as a given and as a challenge. It asks how, if at all, a double tax regime can be designed so that economic actors are powerless to use capital structure to influence tax collections. The linchpin to the answer, set forth in Part VI below, is that the Code cannot allow any nontrivial corporate deduction with respect to any returns earned by any corporate capital providers. In particular, and merely as one example, the corporate deduction for interest expense must be abolished

The Zen of Corporate Capital Structure Neutrality

It is well understood that corporate capital structure affects tax collections. Most basically, corporate interest expense is deductible. With each interest accrual, the corporate tax base shrinks. Thus, there is a broad range of circumstances in which corporate managers are encouraged by the Internal Revenue Code (the Code ) to load their corporate capital structures with debt. But there is little support for the proposition that Conpress desires corporations to adopt such debt-laden capital structures. Indeed, much tax legislation suggests congressional displeasure with the achievable degree of corporate self- integration. On the other hand, corporate equity has its charms: shareholders are able to defer their gains essentially forever. Thus, in some circumstances the Code encourages corporate managers to load their corporate capital structures with equity. Based on the numerous provisions in the Code that depress the relative tax cost of equity, it is probably safe to conclude that Congress is more sanguine about equity than it is about debt. But periodically, Congress tempers its enthusiasm. And academicians as a group find the feature of equity deferral - the realization requirement - quite troubling

Little Boxes: Can Optimal Commodity Tax Methodology Save the Debt-Equity Distinction?

Optimal commodity tax methodology has been proposed as a way of making difficult line drawing decisions in the income tax. This paper explores some practical difficulties with the approach, and concludes that in one area - the debt-equity divide - the approach is unlikely to prove useful over any significant time horizon

How I Learned to Stop Worrying and Love Double Taxation

This Article is divided into three Parts. The first Part is devotedto an example demonstrating that, while double taxation may be gratuitous in a purely domestic context, it invariably becomes necessary in a multinational context. The second Part formalizes and generalizes the example, and concludes that double taxation is not only necessary in a multinational context, but also in any multi-period domestic context. The third Part contains a few policy prescriptions that, I fervently hope, will guide future administrations

The Zen of Corporate Capital Structure Neutrality

It is well understood that corporate capital structure affects tax collections. Most basically, corporate interest expense is deductible. With each interest accrual, the corporate tax base shrinks. Thus, there is a broad range of circumstances in which corporate managers are encouraged by the Internal Revenue Code (the Code ) to load their corporate capital structures with debt. But there is little support for the proposition that Conpress desires corporations to adopt such debt-laden capital structures. Indeed, much tax legislation suggests congressional displeasure with the achievable degree of corporate self- integration. On the other hand, corporate equity has its charms: shareholders are able to defer their gains essentially forever. Thus, in some circumstances the Code encourages corporate managers to load their corporate capital structures with equity. Based on the numerous provisions in the Code that depress the relative tax cost of equity, it is probably safe to conclude that Congress is more sanguine about equity than it is about debt. But periodically, Congress tempers its enthusiasm. And academicians as a group find the feature of equity deferral - the realization requirement - quite troubling

The Cashless Corporate Tax

Proposals for reforming the federal corporate income tax are neverending and ever-multiplying. They range from those that merely tinker around the edges, such as most recent proposals attacking the various perceived abuses that masquerade under the moniker corporate tax shelter, to various integration approaches that arguably would gut the enterprise of a corporate income tax altogether. Since everything and the kitchen sink is at least theoretically in play, it seems appropriate to add this modest proposal, which I call the cashless corporate tax (CCT). As described below, the CCT is a tax that would replace the current corporate income tax-defined as the income tax the government currently collects directly from corporations-with government share ownership. The basic idea is that the government\u27s current rights to corporate cash flows, as set forth in the Code, are functionally a form of equity ownership. Accordingly, it should be possible to replace such rights with direct equity ownership interests in corporations. The primary challenge is to determine the quantity and quality of the equity ownership interests, which, if held by the fisc, would most closely resemble - in whatever ways the legislature or the author deems relevant - the current corporate income tax. It is my hope that the process of meeting that challenge will lead to some insights into the nature of the current corporate income tax

I Come Not to Praise the Corporate Income Tax, But to Save It

This Article began with a search for a theoretical underpinning that could explain the structure of the current corporate income tax regime, and found such underpinning lacking. It proposed an alternative underpinning for a corporate income tax based on the theory of the firm. The basic idea is that every firm generates incremental economic returns that would not be achieved but for its organizational structure as a firm. Thus, a sovereign could rationally choose to confiscate a portion of such returns, since it has made such returns possible (by enacting legislation that recognizes firms, etc.). (Whether or not a sovereign should confiscate a portion of such returns is a different matter entirely.) If it chooses to do so, the resulting corporate tax would not be a corporate tax at all, but a tax on all entities. The Article then showed how such an entity income tax might be structured