	Introduction

In January 2016, Senator Orrin Hatch, chairman of the Senate Finance Committee, announced plans for a tax reform that would explore corporate integration. Corporate integration involves the elimination or reduction of additional taxes on corporate equity investment that arise because corporate income is taxed twice. This system produces differential tax burdens, potentially discouraging the realization of gains on the sale of corporate stock and favoring noncorporate equity investment over corporate investment, debt finance over equity finance, and retained earnings over dividends. This report provides an overview of CRS Report R44638, Corporate Tax Integration and Tax Reform , by [author name scrubbed], which contains a detailed analysis of corporate tax integration issues, data sources, and documentation. One is the increased importance of a global economy and multinational firms with investments and activities in many countries. Currently only about a quarter of the corporate stock of U.S. firms is estimated to be owned by shareholders subject to U.S. individual tax (compared with about half in 1992). If all profits were taxed at the statutory rate, distributed as a dividend, and then taxed at ordinary rates to a shareholder in the 35% bracket, the total tax on a corporate investment would be 58% (a 35% corporate tax and an additional 35% on the remaining 65% of profit) compared with a tax rate of 35% on noncorporate investment, for a 23 percentage point difference. Those effects, however, are smaller because of favorable treatment of dividends and capital gains (the top rate is 23.8%); options to invest stock through tax-exempt accounts, such as retirement plans, that pay no shareholder-level tax; and tax preferences that lower the effective corporate tax rate more than the effective noncorporate rate. Treatment of Debt Finance

If firms borrow to finance investments, the interest is deducted. These estimated rates show a small difference in tax burden overall between equity invested in the corporate versus the noncorporate sector, but show large differences across assets and large differences between debt and equity. These approaches can be divided into three basic types: (1) full integration; (2) partial integration, which addresses only dividends; and (3) proposals that also address the treatment of interest. Full Integration

Full integration would eliminate one of the levels of taxation and apply both to dividends and retained earnings. The tax could be made refundable, so that tax-exempt investors would pay no tax, or it would be nonrefundable, so that foreigners and tax-exempt shareholders would pay the corporate level tax, and taxable individuals would pay tax at the individual rate. Taxing at the Shareholder Level: Mark to Market

Mark to Market would repeal the corporate tax for publicly traded firms, tax dividends and capital gains at ordinary rates, and mark the value of stock to market—that is, tax capital gains on the stock regardless of whether it was sold. Taxing Dividends at the Shareholder Level and Retained Earnings at the Corporate Level

The final full integration proposal would tax dividends to shareholders by allowing a corporate dividend deduction, while eliminating capital gains tax on corporate stock. As with the dividend deduction, preferences could be dealt with by allowing excluded dividends paid out of taxable income. Disallowing interest deductions could be combined with integration approaches, except for mark-to-market. Revenue impacts are an important consideration in any tax reform proposal. These estimates suggest that allowing refundable credits or mark to market do not appear feasible if revenue neutrality is an objective. Mark to market could also be feasible if taxes are imposed directly on exempt or largely exempt firms. Similarly, most proposals would not have significant effects on the international allocation of capital, repatriation, profit-shifting and inversions.
In January 2016, Senator Orrin Hatch, chairman of the Senate Finance Committee, announced plans for a tax reform that would explore corporate integration. Corporate integration involves the elimination or reduction of additional taxes on corporate equity investment that arise because corporate income is taxed twice, once at the corporate level and once at the individual level. Traditional concerns are that this system of taxation is inefficient because it (1) favors noncorporate equity investment over corporate investment, (2) favors debt finance over equity finance, (3) favors retained earnings over dividends, and (4) discourages the realization of gains on the sale of corporate stock. Increasingly, international concerns such as allocation of investment across countries, repatriation of profits earned abroad, shifting profits out of the United States and into tax havens, and inversions (U.S. firms using mergers to shift headquarters to a foreign country) have become issues in any tax reform, corporate integration included.
This report summarizes findings in CRS Report R44638, Corporate Tax Integration and Tax Reform, by [author name scrubbed]. That report examines the effects of different tax treatment of the corporate and noncorporate sectors, the effect of tax preferences, the treatment of debt finance, and the treatment of foreign source income. Estimates suggest that there is little overall difference between corporate and noncorporate investment. A larger share of corporate assets benefits from tax preferences. Only a quarter of shares in U.S. firms is held by taxable individuals; the remainder is held by tax-exempt and largely tax-exempt pension and retirement accounts, nonprofits, and foreigners. Additionally, tax rates on individual dividends and capital gains are lower than ordinary rates.
Effective tax rates across assets differ markedly, with intangible assets most favored and structures least favored. Debt is treated favorably in both the corporate and noncorporate sectors, with large differences and in many cases negative tax rates. Differences in taxes affecting dividend payout choices or realization of capital gains on stock appear to be small because of low tax rates.
The report outlines several approaches to integration. Full integration would address both dividends and retained earnings. Tax could be imposed at the shareholder level with allocation of income and withholding (a modified partnership treatment). Credits for withheld taxes would be provided to shareholders, and credits could be made nonrefundable for tax-exempt and foreign shareholders. A different full integration approach would eliminate shareholder taxes and tax only at the firm level. A third would tax at the shareholder level and not the firm by imposing ordinary rates and taxing not only dividends and realized capital gains but also unrealized gains by marking shares to market prices (i.e., mark-to-market). Partial integration focuses on dividends and could provide either a dividend deduction by the firm (with a withholding tax and credits) or a dividend exclusion to the shareholder. Disallowing interest deductions in full or in part could be combined with most proposals.
The report compares these proposals with respect to impact on revenue, administrative feasibility, and effects on both traditional and international tax choices. Shareholder allocation or dividend deductions with refundable credits produce relatively large revenue losses, as does mark-to-market. Nonrefundability and making modifications in mark-to-market can substantially reduce these revenue losses. Most proposals would have modest efficiency gains or losses. Mark-to-market would tax economic income and potentially produce a number of efficiency gains but may not be feasible on administrative grounds. Disallowing or restricting deductions for interest would lead to efficiency gains on a number of margins and provide revenue to help achieve revenue-neutral reforms.