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1 Patrick Fleenor & Jonathan Williams, Options for Reforming the U.S. Corporate Income Tax 1 (2006)

handle is hein.taxfoundation/fffixz0001 and id is 1 raw text is: r:OuU NDAT10N. May 8, 2006 Options for Reforming the U.S. Corporate Income Tax by Patrick Fleenor and Jonathan Williams Fiscal Fact No. 58 Economists generally agree that economic rather than tax considerations should guide companies' decisions about how to organize and expand. Unfortunately, the corporate income tax often distorts these organizational decisions, making the economy less efficient as a result. Tax-Induced Distortions In the United States, businesses have been traditionally structured in three ways: sole proprietorships, partnerships or corporations. In recent years, however, hybrid forms such as S corporations and limited liability proprietorships and partnerships have also become common (See related Fiscal Fact at http ://ww .taxfoundation.org!ipublicationsishowi / 1477ohtml.) With the exception of traditional C corporations, the income earned by these businesses is reported on the tax returns of the firms' owners-where it is subject to the individual income tax. Income earned by traditional C corporations is subject to tax by both the corporate and individual systems. This double taxation results in corporate income generally being more heavily taxed than non-corporate income. This creates a situation where firm structure is sometimes chosen for tax reasons rather than because it makes the most sense economically. Moreover, under current law, corporations can deduct interest payments when calculating taxable income, but cannot deduct dividend payments. This creates an incentive for firms to finance projects using debt rather than equity. The economic costs of these tax-induced distortions is estimated to be quite high. In 1996 the Congressional Budget Office reviewed a number of studies examining the efficiency losses associated with the corporate income tax and found that they probably exceed half of corporate receipts. At first glance the solution to the problems created by the corporate income tax appears fairly straightforward: simply eliminate the corporate income tax and tax all income at

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