The Case for Dividend Deduction

The December 2010 compromise between President Barack Obama and the Republicans extended the 15% tax rate on dividends through the end of 2012. At that point, however, the rate may revert to the Clinton administration rate-39.6%-or be raised to 20%-as proposed by the Obama Administration. Thus, the United States may either abandon corporate-shareholder integration, maintain partial integration, or perhaps even adopt the George W Bush administration\u27s 2003 proposal to exempt dividends altogether-as advocated by some Republicans in Congress. Given this uncertainty and the likelihood of additional Congressional action, now may be a good time to revisit the integration issue. Another reason for revisiting the topic is that several recent proposals would restrict the deductibility of interest at the corporate level as a way of reducing the pressure on the distinction between debt and equity, which was also a reason to adopt partial integration in 2003. The President\u27s Economic Recovery Advisory Board has identified integration as a top policy priority in its report on options for federal tax reform