There have been various proposals made in the past two decades to integrate the corporate and shareholder tax, including dividend exemption, imputation, and the Comprehensive Business Income Tax (CBIT). In our view, the problem with all of these proposals is that they omit to ask the crucial question of why we should tax business entities in the first place. Taxes, the economists tell us, are always borne by human beings, not by legal entities. Why should legal entities, be they corporations or other forms of business entity, be subject to tax at all? Would it not be easier to just tax people? It turns out that there are two good reasons to tax some business entities under some circumstances. Specifically, we believe that publicly traded corporations should be subject to tax (a) because it is hard to tax them on a pass-though basis, and if they are not taxed they become vehicles for tax deferral, and (b) because they are economically important and taxing them is a means to regulate the behavior of the people who run them. However, if those are the reasons for taxing business entities, then we believe that the right form of achieving corporate integration is not CBIT or its progeny, or dividend exemption, or imputation (giving shareholders a credit for the corporate tax). The right form of integration, we would argue, is dividend deduction. Dividend deduction is frequently mentioned in the literature on integration, but rarely analyzed. In what follows, we will try to explain why it is a superior form of integration, and resolve some of the hard questions it raises.


Tax Law

Date of this Version

September 2010

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