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The United States taxes both corporations and shareholders on corporate profits. In principle, the United States could rely on only one of these taxes, as many commentators have suggested. Although choosing to tax the corporation or its owners may seem like taking money from one pocket or the other, this Essay emphasizes a key difference: These taxes prompt different planning. Relying on one or the other mitigates some distortions and leaks, while exacerbating others. As a result, choosing which to impose is like navigating between Scylla and Charybdis.

In response, this Essay recommends using both taxes for three reasons. First, if one tax is avoided, the other still raises some revenue. Second, if the goal is to deter a planning strategy, cutting the rate to zero is an overreaction. If the rate is low enough, paying a tax is cheaper than avoiding it, since tax planning is not free. Third, if one tax is cut instead of repealed, the other can be correspondingly lower.

Even so, using two taxes poses challenges as well. First, although the taxes are supposed to backstop each other, they cannot do so when a planning strategy avoids both. Second, using two taxes is likely to increase administrative costs. Third, coordinating the taxes to produce the right combined rate – ideally the rate for noncorporate businesses – is not easy.

This Essay also canvasses reforms to shore up both taxes. While the focus is on incremental reform, this Essay's central recommendation extends to more ambitious reforms as well. These reforms also benefit from using two taxes, instead of one.


Business Organizations Law | Law | Law and Economics | Tax Law