Draft Bill and Summary

A Bill

To amend the Internal Revenue Code of 1986 to remove incentives to shift employment abroad, and to remove hidden taxes on retirement savings and provide equitable taxation of earnings.

SECTION 1: SHORT TITLE

This Act may be cited as the “Shared Economic Growth Act of 2016”.

SECTION 2: PROVIDING INCENTIVES TO LOCATE HIGH-VALUE JOBS IN AMERICA AND TO INJECT CASH INTO THE AMERICAN ECONOMY

(a) Part VIII of Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended by adding the following new section:

“251. (a) General Rule. In the case of a corporation, there shall be allowed as a deduction an amount equal to the amount paid as dividends in a taxable year of the corporation beginning on or after January 1, 2017.

(b) Limitation of benefit to tax otherwise payable.

1)     The deduction under this section may not exceed the corporation’s taxable income (as computed before the deduction allowed under this section) for the taxable year in which the dividend is paid, decreased by an amount equal to 2.85 times any tax credits allowed to the corporation in the taxable year.

2)     Where the deduction otherwise allowable under this section in a taxable year exceeds the limitation provided in paragraph 1 of this subsection, the excess may be carried back and taken as a deduction in the two prior taxable years or forward to each of the 20 taxable years following the year in which the dividends were paid. However, the total deduction under this section for dividends paid during the taxable year plus carryovers from other taxable years may not exceed the limit provided in paragraph 1 of this subsection. Rules equivalent to those provided in paragraphs 2 and 3 of subsection 172(b) of this subchapter shall govern the application of such carryover deductions.

3)     No amount carried back under paragraph 2 of this subsection may be claimed as a deduction in any taxable year beginning on or before December 31, 2016.

(c)   Consolidated groups. In the case of a group electing to file a consolidated return under section 1501 of this Subtitle, the deduction provided under this section may be claimed only with respect to dividends paid by the parent corporation of such consolidated group.”

(b) Subparagraph (b)(1)(A) of Section 243 of Part VIII of Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended to read as follows:

            “(A) if the payor of such dividend is not entitled to receive a dividends paid deduction for any amount of such dividend under section 251 of this Part, and if at the close of the day on which such dividend is received, such corporation is a member of the same affiliated group as the corporation distributing such dividend, and”.

(c) Section 244 of Part VIII of Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is repealed for tax years beginning after December 31, 2016.

(d) Subparagraph (a)(3)(A) of Section 245 of Part VIII of Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended to read as follows:

            “(A) the post-1986 undistributed U.S. earnings, excluding any amount for which the distributing corporation or any corporation that paid dividends, directly or indirectly, to the distributing corporation was entitled to receive a deduction under section 251 of this Part, bears to”.

(e) Subsection 1(h) of Part I of Subchapter A of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is repealed for tax years ending after December 31, 2016.

(f) Subsection (a) of Section 901 of Part III of Subchapter N of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended to read as follows:

“(a) Allowance of credit

If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902 and 960.  However, in the case of a corporation, no credit shall be allowed under this section or under section 902 for foreign taxes paid or accrued, or deemed to have been paid or accrued, in tax years beginning after December 31, 2016. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not be allowed against any tax treated as a tax not imposed by this chapter under section 26(b).”

This amendment shall override any contrary provision in any existing income tax convention.

SECTION 3: PREVENTING WINDFALL BENEFITS FOR FOREIGN INVESTORS

(a) Subchapter A of Chapter 3 of Subtitle A of the Internal Revenue Code of 1986 is amended by adding a new Section 1447 to read:

“1447(a) General rule. In the case of dividends paid to any non-resident individual or corporation by a United States corporation that claims a deduction under Section 251 with respect to such dividend, the payor shall deduct and withhold from such dividends the tax shall be equal to 30 percent of the gross amount thereof, in addition to any other tax withheld with respect to such payment under this subchapter. The imposition of this 30 percent withholding tax on dividends shall override any contrary restriction in any income tax convention.

(b) Alternative additional tax. In lieu of the withholding tax provided under subsection (a), a payor corporation may instead elect to forego the benefit of the dividends-paid deduction under Section 251 with regard to so much of the dividends as would otherwise be subject to withholding under subsection (a), and instead to withhold from such dividends an amount of tax equal to the top rate of corporate income tax under Section 11 multiplied by the amount of such dividends, and to apply the tax thus withheld as a prepayment of the payor corporation’s tax liability. Any tax so withheld under this subsection (b) shall act as an incremental final tax on the relevant shareholder that may not be reduced.

(b) Section 871 of Subchapter N of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended by redesignating subsection (n) as subsection (o) and adding a new subsection (n) to read:

“(n) Additional 30 percent tax on deductible dividends paid to nonresident alient individuals.

(1)   General rule. In the case of dividends paid to any non-resident alien individual by a United States corporation that claims a deduction under Section 251 with respect to such dividend, there is hereby imposed for each taxable year a tax equal to 30 percent of the gross amount thereof, in addition to any other tax imposed with respect to such payment under this subchapter. The imposition of this 30 percent tax on dividends shall override any contrary restriction in any income tax convention.

(2)   Exception. In the case of any dividend for which the payor corporation elects the alternative final tax under Section 1447(b), the 30 percent tax under paragraph (1) of this subsection shall not apply.

(3)   Alternative election to pay individual income tax at the highest individual rate. If the non-resident alien taxpayer elects to treat the dividend income otherwise taxable under paragraph (1) of this subsection as income connected with a United States business, and further agrees to pay tax thereon at the highest rate provided under Section 1, then the  30 percent tax under paragraph (1) of this subsection shall not apply.”

(c) Section 881 of Subchapter N of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended by redesignating subsection (f) as subsection (g) and adding a new subsection (f) to read:

“(f) Additional 30 percent tax on deductible dividends paid to foreign corporations.

(1)   General rule. In the case of dividends paid to any foreign corporation by a United States corporation that claims a deduction under Section 251 with respect to such dividend, there is hereby imposed for each taxable year a tax equal to 30 percent of the gross amount thereof, in addition to any other tax imposed with respect to such payment under this subchapter. The imposition of this 30 percent tax on dividends shall override any contrary restriction in any income tax convention.

(2)   Exception. In the case of any dividend for which the payor corporation elects the alternative final tax under Section 1447(b), the 30 percent tax under paragraph (1) of this subsection shall not apply.

(3)   Alternative election to pay income tax at the highest icorporate rate. If the foreign corporate taxpayer elects to treat the dividend income otherwise taxable under paragraph (1) of this subsection as income connected with a United States business, and further agrees to pay tax thereon at the highest rate provided under Section 11, then the  30 percent tax under paragraph (1) of this subsection shall not apply.”

SECTION 4: FAIR FUNDING FOR RETIREMENT SECURITY

(a) Section 1 of Part I of Subchapter A of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended by adding the following new subsection:

“1(h) (1) (a) Tax imposed. There is hereby imposed a tax of 7.65 percent on so much of the adjusted gross income for the taxable year of that exceeds--

(A)  $500,000, in the case of

(i) every married individual (as defined in section 7703) who makes a single return jointly with his spouse under section 6013;

(ii) every surviving spouse (as defined in section 2(a)); and

(iii) every head of a household (as defined in section 2(b)), ;

(B) $250,000, in the case of

(i)    every individual (other than a surviving spouse as defined in section 2(a) or the head of a household as defined in section 2(b)) who is not a married individual (as defined in section 7703); and

(ii) every married individual (as defined in section 7703) who does not make a single return jointly with his spouse under section 6013;

(C) $7,500, in the case of every estate and every trust taxable under this subsection.

 (b) Credit for hospitalization tax paid. There shall be allowed as a credit against the tax imposed by this subsection so much of the amount of hospitalization tax paid by the individual with respect to his wages under subsection 3101(b) and to his self-employment income under subsection 1401(b) of this Title as exceeds the following amounts:

A)    In the case of individuals described in subparagraph (1)(A) of this subsection, $14,500; and

B)    In the case of individuals described in subparagraph (1)(B) of this subsection, $7,250.

 

SECTION 5: REINVESTING IN AMERICA

Subsection (k) of Section 168 of Part I of Subchapter A of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended by adding the following new paragraph:

“168(k)(8) Expensing of investments made from post-2016 earnings. In the case of a corporation subject to tax under Section 11, any qualified U.S. property purchased or constructed from the reinvestment of taxable income accrued in taxable years beginning after December 31, 2016, which income was not offset by a dividends-paid deduction under section 251 or by tax credits, the allowance under subsection (k)(1)(A) of this section shall be 100 percent rather than 50 percent. The Secretary shall prescribe regulations providing for the creation and maintenance of eligible reinvestment accounts, such that taxable income not offset by the Section 251 deduction or credits shall be an addition to the account and investments qualifying for the 100 percent allowance shall be a subtraction from the account, and corporate taxpayers may treat otherwise eligible investments as funded by such earnings to the extent of the positive balance in the reinvestment account.”

Shared Economic Growth – Bill and Computations Summary

The Shared Economic Growth bill allows a corporate dividends paid deduction, restricted to taxable income otherwise reported decreased by  2.85 times any credits claimed, so that the deduction may only reduce tax to zero. Excess reductions could be carried back 2 years and forward 20, so there would be incentive to pay out earnings with 2 years. Subsection 2(a) of the bill makes this change, with Subsections 2(b), (c) and (d) making certain conforming changes to the existing corporate dividends received deduction provisions.

In 2010 corporations paid tax of $223 billion, so offsets of up to $223 billion would be required for static revenue neutrality. The first and most natural offset is individual tax payable on the dividends paid. In order for the proposal to work, special rates for dividends and for capital gains on equity would need to be eliminated, so that these dividends would be taxed at full 2017 individual rates. Subsection 2(e) repeals these special rates, but does not otherwise upset the incentives provided for certain special categories of capital gains. This would have provided an offset of $74 billion without altering the various special capital gains exemption and rollover provisions.  As a practical matter, this offset is only feasible in conjunction with the allowance of a dividends paid deduction, since such a deduction eliminates double taxation on the corporate side and thus eliminates any legitimate argument in favor of the capital gains rate benefits.

Subsection 2(f) provides an offset mechanism that is only possible in conjunction with enactment of a dividends paid deduction. Because the deduction would effectively eliminate taxation of corporate income, including foreign income, it would no longer be necessary to allow a corporate credit for foreign taxes paid. A deduction could be permitted instead with the same bottom line effect. However, allowance of a deduction would impel corporations to pay out more dividends in order to eliminate the corporate level tax on the foreign income, which in turn increases the offset at the individual level. With this provision, the individual level offset from full 2011 rate taxation of the dividends needed to reduce corporate tax to zero would be some $54 billion, after factoring out shareholders not subject to tax.

Section 3 provides another offset only feasible in conjunction with a dividends paid deduction. Foreign investors are effectively paying the 35% U.S. corporate level tax on their investment earnings. Congress would not have to let them have the benefit of the dividends paid deduction, since U.S. resident shareholders would have to pay full rate tax on such dividends. So, Section 3 imposes a 30% incremental withholding tax on dividends paid to foreign shareholders. This offset amounts to some $33 billion. The provision provides certain alternative elections that would be unlikely to be used but which would establish that the incremental tax would be appropriate under the principles of America’s tax treaties, essentially leaving the foreign shareholders in the same economic position that they are in now and keeping them on a level with U.S. shareholders.

Section 4 provides the final offset, subjecting individual income over $500,000 a year to an Adjusted Gross Income tax equivalent to the individual portion of the FICA taxes that ordinary wage earners pay. At a 7.65% level, with an allowance crediting the Obamacare taxes that were implemented since the first version of this proposal was explained to Congress, this levy would offset the revenue attributable to dividends paid to non-taxable retirement plans, so in effect this levy is requiring high income individuals to pay a supplemental tax similar to FICA taxes that supports non-social security private and state pension savings, thereby taking pressure off of the social security system. This is an optional element of the proposal, but it seems like good and fair policy. This provides an offset of $57 billion. Moreover, because these retirement savings will ultimately be paid out and taxed, this would increase revenue by at least some $22 billion per year on a static basis as the pension income is paid out (after accounting for Roth IRAs etc.) This additional revenue will be important as the baby boomers move through retirement and the government is looking for revenues to pay off the deficit in social security funding.

Section 5 provides an optional add-on. Because Shared Economic Growth would make it attractive for corporations to invest in U.S. operations, it would also be desirable to allow them to retain some of their earnings to make such U.S. investments rather than squeezing out too much in dividends, so that we could encourage the most rapid rebuilding of the U.S. economy. Section 5 therefore allows corporations to take a 100% immediate deduction for their investment in qualified U.S. property made from their post-2016 taxable earnings not paid out as dividends. While prior investment expensing initiative were not notably successful in increasing investment, they were in the context of an overall U.S. climate that made investments unattractive. Expensing could be expected to be much more successful at encouraging investment under Shared Economic Growth, and given that it is a relatively short-term timing benefit, the cost to the government would be low (essentially interest on 35% of the investment amount over less than 7 years at the U.S. Treasury borrowing rate). Further, because Shared Economic Growth could be expected to encourage accumulated foreign earnings to be brought home, either producing taxable income that neutralizes this expensing benefit at the corporate level or incurring additional shareholder-level tax when paid out as dividends, there should be more than enough incremental revenue to offset the cost of the timing item.