Former Top Treasury Tax Officials Prefer Corporate Integration

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By Kaustuv Basu

The idea of a dividends paid corporate integration system to reform the corporate tax system may be making a comeback in the Senate.

At least two former Treasury Department assistant secretaries for tax policy who testified July 18 at the Senate Finance Committee’s first tax reform hearing of the year suggested that corporate integration would be better than other options.

Committee Chairman Orrin G. Hatch (R-Utah) explored the idea—which includes a deduction for dividends that corporations pay—throughout 2016, but didn’t release a plan to the public. Corporate income in the U.S. faces a double layer of taxes—at the corporate and the shareholder levels. A corporate integration plan would remove a layer.

Hatch’s staff is now looking at a partial dividends paid corporate integration system, two people familiar with the matter told Bloomberg BNA, on condition of anonymity so they could speak freely.

Jon Talisman, a former Treasury assistant secretary for tax policy in 2000-01, said that a dividends paid corporate integration system would work better than ideas such as limiting the deductibility of business interest.

The House GOP tax reform blueprint would eliminate businesses’ ability to deduct the interest they pay on loans. But Rep. Peter Roskam (R-Ill.), chairman of the Ways and Means Tax Policy Subcommittee, said at a July 13 hearing that the subcommittee is working on provisions that would allow small businesses to deduct the interest they pay on debt.

Senate Plan

Republican tax staff on the Finance Committee have been working on their own reform plan even as some key provisions in the House plan—such as the border adjustment tax, which would tax imports at 20 percent—have come under attack. Although Hatch hasn’t yet released any details of the Senate plan, those familiar with discussions said that corporate integration is in play.

Hatch’s staff is exploring a partial corporate integration proposal—a corporation would be able to deduct 40 percent of the dividend it pays. His original proposal would let a corporation deduct 100 percent of the dividend it pays. The partial corporate integration proposal would be one way to reduce the effective corporate tax rate and inch closer to the 15 percent business rate proposed by the Trump administration, one of the people familiar with the discussion said.

“Corporate integration is a better approach than going after interest deductibility, based on, you know, my discussions with capital-intensive businesses,” Talisman said at the hearing. “Interest deductibility is actually more important to them than most other issues.”

Pamela Olson, former Treasury assistant secretary for tax policy from 2002-04, testified that she prefers corporate integration over eliminating the ability of companies to deduct interest. “There are lot of businesses that depend on debt financing,” she said.

Talk of corporate integration in 2016 worried the retirement savings community, exempt organizations, and insurance companies, whose officials said they feared that removing the double layer of corporate taxation might increase their taxes.

To contact the reporter on this story: Kaustuv Basu in Washington at kbasu@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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