A recent article from Tax Notes titled “Who’s Left to Tax? Grappling With a Dwindling Shareholder Tax Base” discusses the decreasing number of taxable shareholders and its implications for tax policy. Steven Rosenthal and Livia Mucciolo from the Urban-Brookings Tax Policy Center delve into the data behind this trend and its impact on the taxation of dividends and capital income.
The percentage of taxable shareholders has significantly decreased over the years, with a large portion of nontaxable shareholders being foreign investors, retirement accounts, and tax-exempt institutions. The rise in foreign ownership poses a challenge for tax policy, especially in light of the 2017 Tax Cuts and Jobs Act, which led to a windfall for foreign investors. This raises questions about the effectiveness of corporate tax cuts in promoting an “America First” fiscal policy.
The authors highlight the need for transparency in their methodology and data analysis to ensure that readers can engage with the findings and ask questions. They emphasize the importance of understanding the nuances of the data to accurately assess the tax implications for various stakeholders, including passthrough entities like S corps and partnerships.
One of the key issues discussed is the favoritism towards stock buybacks over dividend distributions, particularly in terms of tax advantages for foreign investors. The authors suggest that increasing the buyback excise tax could help level the playing field and reduce the tax advantages enjoyed by buybacks. Additionally, they propose a withholding tax on corporate distributions to foreign investors to ensure that taxes are collected at the shareholder level.
In considering potential solutions, the authors advocate for a withholding tax on corporate distributions to foreign investors, coupled with a credit for taxes paid at the corporate level. This approach could help ensure that taxes are collected from taxable shareholders while also addressing concerns about U.S. corporations migrating abroad. They also recommend aligning the U.S. corporate tax system with global standards to create a more robust and competitive tax environment.
Overall, the article highlights the challenges posed by a dwindling shareholder tax base and calls for innovative solutions to ensure that taxes are collected fairly and efficiently. By addressing issues such as foreign ownership and tax advantages for buybacks, policymakers can create a more equitable tax system that benefits all stakeholders.
