Hatch Pushes Plan to Tax Dividends at Ordinary Income Rates

Senate Finance Committee Chairman Orrin Hatch plans to, within weeks, release a plan to avoid the double taxation of corporate income by taxing shareholders' dividends as ordinary income, the Wall Street Journal reports.

The GOP Utah lawmaker's plan is being driven, in part at least, by a new study that shows a shrinking fraction of shareholders in U.S. corporations pay taxes on dividends.

According to the Journal, Hatch's plan would let companies deduct dividends, lowering their effective corporate tax rate "as a backdoor way to reduce the United States' world-high top statutory tax rate of 35 percent."

The plan would provide instead that individual shareholders' taxable dividends would be taxed as ordinary income instead of at lower capital-gains rates.

But because the plan would disrupt the businesses and shareholders that enjoy tax advantages now, "the politics of this are just unbelievably daunting," Peter Merrill, a principal in the national economics and statistics group at PwC LLP, told the Journal.

Over the past few decades, corporations have cut their tax bills, including aggressive shifting of profits into lower-tax countries. And as individual marginal tax rates dipped below the combined tax rate on corporations and taxable investors, new firms chose to operate as partnerships. Such companies pay just one layer of tax, because their business income passes through to owners' individual returns.

"Our tax code shouldn't punish any particular business with double taxation simply because it was organized in a certain way," explained Hatch.


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