Economic Effects of the 2003 Partial Integration Proposal in the United States

On January 7, 2003, President George W. Bush proposed a significant change in capital income taxation in the United States. In the context of a “jobs and growth” package, the President proposed to reduce substantially the double taxation of corporate-source income by eliminating investor-level taxes on dividends paid from earnings on which corporate tax had been paid. In addition, the President’s proposal would have reduced the tax on retained earnings by allowing a basis adjustment for accumulated previously taxed retained earnings. Taken together, these proposals would have moved the U.S. income tax much closer to an integrated tax system along the lines outlined by the Treasury Department in President George H.W. Bush’s administration a decade earlier. Putting together the impacts of the President’s proposal on economic activity through greater capital accumulation and improved calculation, I estimate that the proposal, if it had been enacted in its original form, would yield a permanent increase of 0.48 percent in the U.S. economy’s potential output. This estimated gain does not include any gains made possible by improved corporate financial policy. Copyright Springer Science + Business Media, Inc. 2005