[A]t least one of [Warren's] key conclusions, dismissing the BEIT plan as having no apparent rationale, is overly harsh in an important way. I therefore wish to augment the debate by explaining why, in my view, the BEIT remains an important corporate tax reform proposal that merits further attention notwithstanding any defects in its current form that he may have demonstrated.
I should note, however, that in two respects my analysis here is orthogonal, rather than directly responsive, to
Second, one reason I consider the BEIT potentially appealing relates to a possible direction of U.S. tax law change that neither Kleinbard nor Warren considers because it has not happened yet, and indeed may never happen. Purely as a matter of prediction, and without regard to the policy merits (though they might be positive), I believe there is a strong chance that worldwide competitive pressures will lead the United States to adopt a corporate tax rate that is significantly below the top individual rate .... [This] would give new importance to the way in which the BEIT relates entity level and investor level tax collection.
Only one previously proposed corporate integration plan resembles the BEIT in its approach to the income tax distinction between debt and equity: the comprehensive business income tax (CBIT) that the U.S. Treasury Department proposed in 1992. In effect, the CBIT would revise the tax treatment of debt to be more like that of equity, by denying deductions for interest at the business level and making the receipt of both interest and dividends generally tax-free to investors. The BEIT reverses this, making the tax treatment of equity more like that of debt, by providing cost of capital deductions at the company level along with inclusions at the investor level.
This reconciliation between the tax treatment of debt and equity, accomplished by both the CBIT and the BEIT, could be enormously important. Modern financial innovation has made the tax distinction between the two types of instrument ever more porous and manipulable. Insofar as investors can slap whichever label they prefer on whatever sort of investment position they wish to have, the debt-equity distinction amounts to an election to use either the corporation’s tax rate (via the use of equity) or one’s own (via the use of debt), whichever is lower. It is hard to think of a good rationale for such an election, and allowing it might be all the more significant if the corporate rate were reduced significantly below the top individual rate.
Why reverse the CBIT approach and tax the normal return at the investor rather than the corporate level? This has been my main concern about the BEIT, as the change might not make enough difference to be worth the trouble if the corporate rate and the top individual rate are the same. However, if I am right in my surmise that the corporate rate may soon be lowered significantly below the top individual rate, then at some point it really will matter. What is more, one could argue that the BEIT approach is better in this scenario, if the reason for the lower corporate rate is entity-level capital mobility that does not apply in the same way to high-income individuals who are