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The Pitfalls of International Integration: A Comment on the Bush Proposal and Its Aftermath

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  • Reuven Avi-Yonah

    (University of Michigan)

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    Abstract

    In January 2003, the Bus Administration proposed a new system for taxing corporate dividends, under which domestic shareholders in U.S. corporations would not be taxed on dividends they received, provided the corporation distributed these dividends out of after-tax earnings (the "Bush Proposal"). The Bush Proposal was introduced in Congress in February 27,2003. Ultimately, however, Congress balked at enacting full-fledged dividend exemption. Instead, in the Jobs and Growth Tax Relief Reconciliation Act of 2003 ("JGTRRA") as enacted on May 28, 2003, a lower rate of 15% was adopted for dividends paid by domestic and certain foreign corporations, and the capital gains rate was likewise reduced to 15%. Significantly, and in stark contrast to the original Bush proposal, under JGTRRA the lower ate for dividends and capital gains does not depend on any tax being paid at the corporate level. This comment will focus primarily on the international aspects of both the Bush Proposal and JGTRRA. I will not lay out the proposal or the law in any detail. Instead, I will ask whether either the Bush Proposal or JGTRRA make sense from an economic efficiency perspective when the international implications are taken into account. I will leave to others the question of whether either the Bush Proposal or JGTRRA are sensible ways to stimulate the economy (for discussion for the effect of the 2001 tax cuts see Shapiro and Slemrod, 2001,2002). I will also omit ay discussion of the distributive effects of either the Bush Proposal or JGTRRA, which have been extensively discussed elsewhere (e.g. Tax Policy Center, 2003; Burman, Gale and Orszag, 2003

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    Paper provided by University of Michigan John M. Olin Center for Law & Economics in its series University of Michigan John M. Olin Center for Law & Economics Working Paper Series with number umichlwps-1007.

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    Handle: RePEc:bep:uomlwp:umichlwps-1007

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    Web page: http://www.law.umich.edu/

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    1. Fullerton, Don & Metcalf, Gilbert E., 2002. "Tax incidence," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 26, pages 1787-1872 Elsevier.
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    14. Gravelle, Jane G & Kotlikoff, Laurence J, 1989. "The Incidence and Efficiency Costs of Corporate Taxation When Corporate and Noncorporate Firms Produce the Same Good," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 749-80, August.
    15. Mutti, John & Grubert, Harry, 1985. "The taxation of capital income in an open economy: the importance of resident-nonresident tax treatment," Journal of Public Economics, Elsevier, vol. 27(3), pages 291-309, August.
    16. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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