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

  • Reuven Avi-Yonah


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    In January 2003, the Bush 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 on 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, 1 and the capital gains rate was likewise reduced to 15%. Significantly and in stark contrast to the original Bush proposal, under JGTRRA the lower rate 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 of the effect of the 2001 tax cuts see Shapiro and Slemrod, 2001, 2002). I will also omit any 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). Copyright Springer Science + Business Media, Inc. 2005

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    Article provided by Springer in its journal International Tax and Public Finance.

    Volume (Year): 12 (2005)
    Issue (Month): 1 (January)
    Pages: 87-95

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    Handle: RePEc:kap:itaxpf:v:12:y:2005:i:1:p:87-95
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    1. Desai, Mihir A. & Hines, James R. Jr., 2003. "Evaluating International Tax Reform," National Tax Journal, National Tax Association, vol. 56(3), pages 487-502, September.
    2. 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.
    3. Matthew D. Shapiro & Joel Slemrod, 2003. "Consumer Response to Tax Rebates," American Economic Review, American Economic Association, vol. 93(1), pages 381-396, March.
    4. Boadway, Robin & Bruce, Neil, 1992. "Problems with integrating corporate and personal income taxes in an open economy," Journal of Public Economics, Elsevier, vol. 48(1), pages 39-66, June.
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    7. Grubert, Harry & Mutti, John, 1994. "International Aspects of Corporate Tax Integration: The Contrasting Role of Debt and Equity Flows," National Tax Journal, National Tax Association, vol. 47(1), pages 111-33, March.
    8. 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.
    9. R. Grieson, 1972. "The Incidence of Profits Taxes in a Neo-Classical Growth Model," Working papers 83, Massachusetts Institute of Technology (MIT), Department of Economics.
    10. Clemens Fuest & Bernd Huber, 2000. "The Optimal Taxation of Dividends in a Small Open Economy," CESifo Working Paper Series 348, CESifo Group Munich.
    11. Feldstein, Martin S, 1974. "Incidence of a Capital Income Tax in a Growing Economy with Variable Savings Rates," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 505-13, October.
    12. 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.
    13. Austan Goolsbee, 2002. "The Impact and Inefficiency of the Corporate Income Tax: Evidence from State Organizational Form Data," NBER Working Papers 9141, National Bureau of Economic Research, Inc.
    14. Casey B. Mulligan, 2002. "Capital Tax Incidence: First Impressions from the Time Series," NBER Working Papers 9374, National Bureau of Economic Research, Inc.
    15. Homma, Masaaki, 1981. "A dynamic analysis of the differential incidence of capital and labour taxes in a two-class economy," Journal of Public Economics, Elsevier, vol. 15(3), pages 363-378, June.
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