Enacting Dividend Exemption and Tax Revenue

This paper first presents a "static" no-behavioral-change estimate of the revenue implications of dividend exemption, and how it depends on the various components of the scheme that are assumed. Using 1996 data, we find that there is a "static" gain in excess of $9 billion. The allocations of parent overhead expense to exempt income and the full taxation of sales source and royalty income, which can no longer be shielded by excess credits flowing over from dividends, are much more significant than the foregone taxes on dividends. The Treasury files are then used to evaluate the potential significance of behavioral responses, the most important of which involve expense allocations and royalties. The objective of the analysis is to identify companies that have the same incentives under current law as all companies would have under exemption. The evidence suggests that the behavioral changes may be large but that they would tend to offset each other. Royalty payments will decline but, at the same time, parent multinational corporations will carry less debt on their own books.