Ethan Yale

Corporate Distributions Tax Reform: Exploring the Alternatives

PUBLISHER
Virginia Tax Review
DATE
2010
 

Abstract

Current law imposes materially different tax burdens on economically comparable yet formally distinct methods of distributing corporate profits to shareholders. The resulting behavioral distortions are significant. This article is a description and evaluation of several proposals for reforming the taxation of corporate distributions to eliminate this distortion. Four proposals are considered: (1) a new proposal that would tax pro rata distributions (dividends) like stock sales by allowing the taxpayer to recover a fraction of stock basis on the receipt of the dividend; (2) a proposal (by George Yin) to impose a uniform corporate-level tax on distributions of all types, including dividends and redemptions, and that would exempt stock sales from tax; (3) a proposal (by Marvin Chirelstein) to tax redemptions as though they were pro rata distributions followed by stock sales by the redeemed shareholders to the nonredeemed shareholders; and (4) mark-to-market taxation, under which all accrued gains would be taxed annually even without a stock sale or distribution. I compare the proposals along several dimensions, including the extent to which they warp incentives with respect to the form and timing of distributions, the timing of stock sales, and use of the corporate form. I also assess the flexibility of the various proposals in accommodating special rules for particular classes of shareholders, such as nonresidents and tax exempts.

Citation

Ethan Yale, Corporate Distributions Tax Reform: Exploring the Alternatives, 29 Virginia Tax Review 329-380 (2010).
 

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