Hatch touts benefits of deduction for dividends

Hatch touts benefits of deduction for dividends
© Greg Nash

Senate Finance Committee Orrin HatchOrrin Grant HatchTrump to award racing legend Roger Penske with Presidential Medal of Freedom Trump awards Presidential Medal of Freedom to economist, former Reagan adviser Arthur Laffer Second ex-Senate staffer charged in aiding doxxing of GOP senators MORE (R-Utah) on Tuesday touted the benefits of integrating the individual and corporate tax systems by allowing companies to deduct dividends.

Hatch said at a Finance Committee hearing that he has been working on a “corporate integration” proposal that would provide this type of deduction, and he is planning to release the proposal in the “next several weeks.”

Under current law, corporate earnings may be taxed once under the corporate tax code and a second time under the individual tax code when earnings are paid to shareholders as dividends.

Hatch said that allowing corporations to deduct dividends would allow businesses to reduce their effective tax rates and reduce the desire for U.S. companies to reincorporate overseas. It would also treat debt and equity more equally, since corporations already can deduct interest paid to holders of their debt.

Hatch said that a corporate integration proposal is not a cure for all issues with the tax code but is  “something that could pass that would put us in the right direction and solve a number of problems.”

Some of the witnesses at the hearing also said that integrating the tax systems would be beneficial but would not solve all of the problems with the corporate tax code.

Michael Graetz, a tax law professor at Columbia University, said he strongly supports a corporate integration proposal like the one Hatch is preparing, since it would “improve the system by shifting taxation from companies which are highly mobile to shareholders who are not.”

Graetz also supports significantly lowering the corporate tax rate and creating a progressive consumption tax.

Bret Wells, a law professor at the University of Houston, said “there is much to commend about this proposal” since it would level the playing field between corporations and pass-through businesses. However, the dividend deduction regime alone would not make U.S. multinational corporations have an equal tax position as foreign-based corporations.

Senate Finance Committee Ranking Member Ron WydenRonald (Ron) Lee WydenPelosi: Congress will receive election security briefing in July The Hill's Morning Report - Democratic debates: Miami nice or spice? Senate Finance leaders in talks on deal to limit drug price increases MORE (D-Ore.) said that he will work closely with Hatch on his corporate-integration ideas. But Wyden and other Democrats on the committee expressed concerns that a corporate integration proposal would hurt retirement savings.

“It looks on its face like this proposal could go from double taxing corporate income to double taxing retirement plans,” Wyden said.

To finance the deduction for dividends, there would be a withholding tax on a portion of the money companies pay out in dividends and bond interest. People currently pay taxes when they take money out of their retirement accounts, and under a corporate integration, the dividends and interest on investments in their plans would also be taxed up front, Wyden said.

Judy Miller, director of retirement policy at the American Retirement Association, said that a corporate integration proposal could dissuade people from saving through 401(k) plans and would disincentivize small-business owners from offering those plans.

“Corporate integration may be good tax policy in theory, but it would be horrible retirement policy in practice if there’s no incentive for [a] small-business owner to set up and maintain a retirement plan,” Miller said.

Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, said that most corporate earnings are not actually taxed twice. About three-fourths of corporate stock is held in non-taxable accounts, and the remaining earnings are often taxed at reduced rates, he said.

Hatch acknowledged the concerns of retirement plans but said that “I believe we can craft a system where these parties will be treated in a manner that is comparable to current law, in fact, in many cases will likely be better off.”