Study Fuels Corporate "Double Tax" Reform Momentum, But Retirement Plans, Small Biz May Lose Out

The study is emboldening Senate Finance Chairman Orrin Hatch (R., Utah), who says he is within weeks of releasing a proposal that would largely end the remaining double taxation of corporate dividends by shifting the burden from highly mobile corporations to less mobile shareholders.

Sen. Hatch's plan would let companies deduct dividends, lowering their effective corporate tax rate as a backdoor way to reduce the U.S.'s world-high top statutory tax rate of 35%. Individual taxable shareholders' dividends would be taxed as ordinary income instead of at lower capital-gains rates. Those taxes would be directly withheld by companies when they pay dividends to investors.

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From 2010 to 2014, public companies with positive domestic pretax book income paid 32.2% of that income as dividends and another 43.4% as share repurchases, according to Mr. Merrill. Under Mr. Hatch's plan, companies would have greater incentives to increase dividends and substitute payouts for buybacks.

Mr. Hatch would also lessen or eliminate the tax code's bias toward debt financing, because companies can deduct interest payments to bondholders but not dividends to shareholders. To keep the plan from increasing budget deficits, Mr. Hatch may include a tax on interest paid to foreigners and tax-exempt entities to make sure someone pays tax on that business income.

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Dealing with tax-deferred investors--such as owners of 401(k) plans--is trickier. Sen. Ron Wyden (D., Ore.) said he was concerned about who might pay more. "This proposal looks like it could go from double-taxing corporate income to double-taxing retirement plans," he said.