Exploring the Shrinking Shareholder Tax Base
In a recent discussion, Robert Goulder, Steve Rosenthal, and Livia Mucciolo delved into the implications of a decreasing shareholder tax base on future tax policies. Their conversation, based on updated data from the Urban-Brookings Tax Policy Center, highlighted a significant decline in taxable shareholders over the years, raising concerns about the effectiveness of taxing dividends and capital income.
According to Rosenthal, the largest group of nontaxable shareholders comprises foreign investors, who benefit from lightly taxed dividends and tax-free capital gains. Retirement accounts also contribute to the non-taxable status, having grown substantially as a tax expenditure. This shift in shareholder composition has profound implications for tax reform efforts, similar to those experienced during the Tax Reform Act of 1986 and the Tax Cuts and Jobs Act of 2017.
Mucciolo emphasized the need for clarity and transparency in tax data analysis. The duo’s work aims to provide a detailed breakdown of taxable shares, challenging previous overestimations by economists. Their forthcoming article in Tax Notes includes an appendix detailing their methodology, encouraging readers to engage with and continue this line of research.
The conversation also touched on the implications for passthrough entities and stock buybacks. Rosenthal pointed out that passthroughs are generally taxed more effectively than publicly traded corporations. However, he noted that both corporate levels and shareholders are taxed inadequately, leading to an increase in foreign investment in U.S. corporations due to the lack of substantial taxation.
Rosenthal further discussed the favorable tax treatment of stock buybacks over dividend distributions, especially for foreign investors. He suggested that increasing the buyback excise tax could help balance the tax advantages between buybacks and dividends.
When considering solutions to address these tax challenges, Rosenthal proposed a withholding tax on corporate distributions to foreign investors, coupled with a credit for taxes paid at the corporate level for taxable shareholders. This approach could ensure a more equitable tax system and prevent the migration of U.S. corporations abroad, especially with the adoption of anti-inversion measures and a global corporate minimum tax.
Their research presents a compelling narrative that could reshape how policymakers view corporate taxation and shareholder equity in an increasingly global investment landscape.
