海角大神

Corporate tax reform is on the national agenda, with the House GOP hoping for a聽聽and President Trump threatening a "big border tax.鈥澛燭he President wants US companies to stay put, and he vows to remember the 鈥渇orgotten people,鈥� or working class Americans. Some of those Americans are corporate shareholders.聽

Are there ways to reform the US corporate tax system that benefits them? Maybe. We just need to remember who pays corporate taxes and how.聽

Thanks in large part to the financial market collapse of 2008, stock ownership has been declining.聽聽about 49 percent of all adults owned stock in 2013 down, from 53 percent in 2007. For聽聽of the income distribution, the stock ownership rate dropped from 14 percent in 2007 to 11.7 percent in 2010.聽

Much of that stock equity is tax-exempt, held in individual retirement accounts or employer-based retirement plans. My TPC colleagues Steve Rosenthal and Lydia Austin estimate that only about one-quarter of US stocks are held in taxable accounts,聽聽over the past 50 years.聽

Could corporate tax reform help those middle-income owners of taxable stock that remain? Perhaps.聽

Take my own story: On June 19, 1987, my dad helped me invest my babysitting earnings in shares of four companies. Exactly聽聽my dad said 鈥淭he market crashed, but your stocks will come back. You鈥檙e young, you have time, don鈥檛 sell.鈥� So I held my stocks for the long run, reinvested the dividends, and paid taxes on those distributions each year.聽

Last year, one of those companies completed a聽. The company reduced its tax bill by changing its mailing address to a low-tax jurisdiction, and for聽, tax bills skyrocketed. That鈥檚 because on paper, we sold stock in a US company and acquired shares in different, foreign, company. For me, that translated into an immediate tax bill for 30 years of capital gains. I鈥檓 not complaining about those gains, they鈥檙e great, but鈥� ouch.

My dad didn鈥檛 warn me about this back in 1987, and he鈥檚 relieved I have the resources to pay the taxes I owe. But what about other small, long-term shareholders who might be feeling anything but great? What if stocks were taxed differently?聽

My TPC colleague Eric Toder and Alan Viard of the American Enterprise Institute聽聽to do it. They proposed an updated version last year, and just last month, Republican Senator Mike Lee of Utah said he聽聽of it. 聽

Eric and Alan would cut corporate tax rates from 35 percent to 15 percent. That would make US corporate tax rates competitive with the rest of the world and reduce a company鈥檚 incentive to invert. They'd also require shareholders to pay tax at ordinary income rates on dividends and on their 鈥渁ccrued,鈥� capital gains each year.聽

In other words, your broker would determine how much your investment increased in value over the year, and you鈥檇 pay tax on that profit (or report a loss)鈥攅ven if you didn鈥檛 sell your shares. Taxable investors would get a credit against taxes already paid by the corporation.聽

But wait鈥攊sn鈥檛 paying tax on unrealized gains a raw deal for shareholders, especially for those folks who don鈥檛 own a lot of shares and may not have the resources to pay the tax?聽

Not to worry: Eric and Alan would not count the first $500 ($1,000 for couples) of annual growth (or loss) on a stock. In addition, they鈥檇 allow investors to smooth out big accrued gains over several years so they wouldn鈥檛 face tax sticker shock if an investment took off.

Would the small-investor exemption add to the deficit? Nope. While TPC estimates that about 90 percent of taxpayers have dividends and realized capital gains below $500/$1,000, their gains comprise only 3 percent of the projected tax revenue from shareholders.聽

As a small stockholder, I like this plan. It could make US businesses more tax competitive and less likely to invert, reducing opportunities by US-based multinational firms to game the tax system, and protect small shareholders from taxes on their investments. Shareholders of all sizes would have less reason to hang on to stock just to avoid paying capital gains taxes. Or, they might not prematurely dump different stock at a loss just聽 to soften the tax pain of another stock鈥檚 gain. Larger investors would pay tax (or generate tax losses) in the year they occur.聽

It鈥檚 fair. It鈥檚 understandable, even to a layperson like me. How often can you say that about corporate tax policy?

And maybe it鈥檚 just plain good. What if middle-income Americans knew that they could invest a little money in a US company and watch it grow over time鈥攚ithout a tax consequence when their holdings are small and聽 they may not have the resources to cover taxes owed? Maybe they'd be more likely to invest over the long-term and reap the rewards of their patience years, or even decades, later.聽

That could be more than good. It could be great.

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