The Pitfalls of International Integration: A Comment on the Bush Proposal and Its Aftermath

In January 2003, the Bus Administration proposed a new system for taxing corporate dividends, under which domestic shareholders in U.S. corporations would not be taxed on dividends they received, provided the corporation distributed these dividends out of after-tax earnings (the "Bush Proposal"). The Bush Proposal was introduced in Congress in February 27,2003. Ultimately, however, Congress balked at enacting full-fledged dividend exemption. Instead, in the Jobs and Growth Tax Relief Reconciliation Act of 2003 ("JGTRRA") as enacted on May 28, 2003, a lower rate of 15% was adopted for dividends paid by domestic and certain foreign corporations, and the capital gains rate was likewise reduced to 15%. Significantly, and in stark contrast to the original Bush proposal, under JGTRRA the lower ate for dividends and capital gains does not depend on any tax being paid at the corporate level. This comment will focus primarily on the international aspects of both the Bush Proposal and JGTRRA. I will not lay out the proposal or the law in any detail. Instead, I will ask whether either the Bush Proposal or JGTRRA make sense from an economic efficiency perspective when the international implications are taken into account. I will leave to others the question of whether either the Bush Proposal or JGTRRA are sensible ways to stimulate the economy (for discussion for the effect of the 2001 tax cuts see Shapiro and Slemrod, 2001,2002). I will also omit ay discussion of the distributive effects of either the Bush Proposal or JGTRRA, which have been extensively discussed elsewhere (e.g. Tax Policy Center, 2003; Burman, Gale and Orszag, 2003