Who Should Pay the Corporate Tax in a Flat Tax World ?
W ho Should Pay the Corporate Tax in a Flat Tax World ?
Rebecca S. Rudnick 0
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Review
Volume 39
This article reviews the corporatetax system within the
context of the historical bias and current effects of the current
system of taxation of corporations and shareholders. Drawing on
public finance theory, financial markets microstructure research,
and perspectives on corporate governance, Professor Rudnick
proposes a profits tax on the liquid equity offirms. She finds this
to be a normative rationalefor a double tax system
under
opti*
Assistant Professor of Law, Indiana University
Bloomington; B.A., Willamette
University (1974); J.D., University of Texas (1978); LL.M., New York University (1985).
Copyright © 1989 Rebecca S. Rudnick
I was a member and secretary of the American Bar Association Tax Section Task
Force on Passthrough Entities which submitted its final report in July 1988. The views
expressed in this article are my own and not those of the Task Force.
Much of the work on this article was done while I was visiting at the University of
Texas School of Law. I thank my research assistants, Tami Walker and Monika Rutland,
for their help and David Gunn of the Tarlton Law Library for his unfailing cooperation.
For the subsequent work at Indiana I thank Melissa Brown and particularly appreciate the
steadfast help of Kellye Testy. I gratefully acknowledge secretarial assistance from Shirley
Walker at Indiana and Pat Floyd at Texas. A research grant from Indiana was also
gratefully received for the project. Valuable comments were received at faculty workshops at
Texas and Indiana, and from Calvin Johnson, Joseph Bankman, Joseph Pechman, Carl
Shoup, Merritt Fox, Stephen Utz, Glenn Coven, Robert Hamilton, John Chown, Richard
Bird, John Wilson, John Dzienkowski, and especially Robert Anthoine. Anjan Thakor and
Michael Simkowitz at the Indiana University School of Business and Edward Altman and
Ernest Bloch at the New York University Graduate School of Business were particularly
helpful on financial markets and related matters.
The apparent and hidden mistakes are all my own as is the thesis.
This article is dedicated to the memory of Henry Simon Bloch who would have added
immensely to its intellectual content.
mal tax principles due to the inelasticity of demandfor and
supply of liquidity and the economic rent it produces. The value of
liquidity in different capital markets is the crucial determinate.
Under traditional tax policy criteria of horizontal and vertical
equity and efficiency, this approach correctly classifies those
firms that can normatively be included in a double tax system
after an interest return on equity is deducted. Drawingthe line at
liquidity allows the fullest expansion of passthrough regimes
such as Subchapter S and partnership taxation as well as other
forms of integration.
b. Berle and Means Revisited - The
Economic Personality of the Firm
c. The Power Rationale in a Flat Tax
W orld ........................
III. Proposal for a Profits Tax on Publicly Traded
Firms With Liquid Equity ....................
A. The Value of Liquidity ...................
1. Liquidity and the Cost of Firm Capital
2. M onitoring .........................
3. Diversification and Portfolio Changes
B. Definition of Liquidity ....................
1. Realization and Speed ...............
2. Time, Valuation, and Market .........
3. Liquidity in Existing Markets .........
C. Proposal ................................
IV. Present and Proposed Provisions That Draw the
Line for Double Taxation on the Basis of Public
Trading ....................................
A. Proposals by Congressional Committees and
the Treasury ............................
B. Public Trading as a Worldwide Standard in
Taxation ...............................
C. The 1987 Publicly Traded Partnership
Legislation ..............................
V. Other Proposed Rationales for the Double Tax Are
Ineffective in Formulating a Unified Theory .....
A. Misuse of Material Participation Standard ..
B. Ineffectiveness of Small Number of Owners
Standard ...............................
C. Economic Size Standard ..................
D. Surcharge on Passthrough Income .........
E. Return to the Pre-1986 System ............
VI. Testing the Proposal Against Tax Policy Criteria.
A. Profits Taxation Theory ...................
B. Optimal Taxation Theory..................
1. Optimal Taxation and Commodities ....
2. Profits Taxation Viewed Under Optimal
Tax Principles ......................
C. Implementation of Profits Taxation and the
ALI Proposals ..........................
D. Summary of Profits and Optimal Tax Theory
and (...truncated)