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The turning point in the development of the corporate tax may have been the decade following World War II. There was significant consensus that the taxation of corporations was problematic. Businesses had borne a significant brunt of the burden during the war. Over a four-year period, corporate income tax rates had more than doubled from 19 to 40 percent, and Congress enacted a new excess profits tax at rates topping out at 95 percent. By January of 1946, at least sixty proposals for the relief of double taxation were in circulation, many of which were repackaged or reintroduced during succeeding years. It was not until 1954, however, as part of a comprehensive revamp of the Internal Revenue Code, that Congress enacted a modicum of dividend tax relief in the form of a phased-in $100 exemption and a 4 percent shareholder credit. This chapter considers four questions: (1) Why did it take so long for dividend tax relief to be enacted, given the initial momentum in favor of reform?; (2) What led dividend tax reform to rise to the top of the agenda in 1954?; (3) Why, given the degree of interest in integration proposals, was the relief so modest? And; (4) Why was it ultimately so short-lived?.

This chapter discusses the roots of double taxation. The 1930s marked a shift in tax policy toward corporations. Much of the focus during the post-war years had been on creating a separate corporate tax that would permit corporations to shield retained earnings from the high individual rates so they could be reinvested in the business. Toward the end of the 1920s, however, and in particular after the stock market crash in 1929 and the onset of the Great Depression, it became apparent that that there was a dark side to this system that enabled the locking-in of the earnings from corporate capital. President Franklin Delano Roosevelt and Congress initiated a number of corporate tax reforms designed to address the difficulties associated with earnings lock-in. Perhaps most controversial, legislation aimed at the problem of earnings lock-in was the enactment of an undistributed profits tax in 1936. Not only was this tax short-lived, but it led corporate managers and their representatives to support double taxation as a defensive maneuver against the punitive taxation of retained earnings.

This chapter discusses the transition from the Civil War era's industry-based approach to taxation, to corporate taxes. At the state level, the separate corporate tax began to emerge in the latter half of the 19th century as a result of frustration with the property tax and the spread of corporations formed under the new general incorporation statutes. Some of the same factors motivating the adoption of corporate income taxes at the state level also helped to influence developments at the federal level.

This chapter examines recent corporate tax reform activities and the future of corporate income tax. Topics covered include the dividend tax cut of 2003, the 2007 Treasury Conference and Rangel Bill, the corporate income tax and dividend policy, the trend away from corporations and toward alternative forms of business enterprises, and the globalization of corporate tax competition.

This chapter discusses corporate tax in the early 20th century. The 1894 corporate income tax represented the culmination of a gradual evolution of corporate taxation at the state and federal level during the 19th century, but it was still more closely aligned with the shareholder-centric corporate taxation of the Civil War era than with the modern corporate income tax. It was not until 1909 that Congress actually targeted the corporation with an entity-level tax. In that legislation, Congress imposed an excise tax against corporations, which was measured by corporate income. The 1909 corporate excise tax was imposed in lieu of a general income tax because of the Supreme Court's decision in Pollock that struck down the income tax enacted in 1894. Rather than being the forerunner of the modern corporate income tax, it was the successor to efforts beginning in the Spanish–American War in 1898 to enact a substitute for an income tax that would not run afoul of the Court's ruling. While corporate taxation between the Court's decision in Pollock and the ratification of the Sixteenth Amendment was significant because it targeted the corporation for the first time, the focus was still on reaching the shareholders. Thus, the separate tax principle, which Robert Clark has called one of the fundamental features of the modern corporate income tax system, was not fully introduced until later in the 20th century.

This chapter details the advent of the separate corporate tax. Although the ratification of the Sixteenth Amendment in 1913 allowed Congress to adopt an individual income tax, the corporate income tax remained a complementary, rather than separate, tax. The start of the separate entity-level tax can be traced to the divergence of the corporate and individual income tax rates beginning in World War I and continuing through the 1920s. During the war, Congress acknowledged the increasingly important role of retained earnings as a cushion in the event of downturn and as a fund for investment in the economy. Taxing all business income on the pass-through model applied to partnerships would subject corporate retained earnings to the skyrocketing individual surtax rates. To avoid this, Congress delinked the corporate and individual tax systems and thereby shielded retained earnings from those high individual rates. This began the transformation of the corporate income tax from a shareholder withholding mechanism — a sword — to a separate, entity-level, tax: a shield.

This chapter continues the discussion of the transition to a separate corporate income tax in the 20th century. In the first two decades of the 20th century, mergers and acquisitions became commonplace, with large corporations securing control over many of the nation's largest industries. The first great merger movement, which took place at the turn of the century, was followed soon after by another period of significant consolidation during World War I. Between 1915 and 1920, an average of 139 firms disappeared annually as a result of mergers, with as many as 195 firms merging out of existence each year from 1917 to 1920. The chapter details the events leading to the enactment of the Revenue Acts of 1918, 1921, and 1924.

This chapter examines the evolution of corporate taxation primarily (but not only) in the G7 countries with respect to the definition of a corporate taxpayer, corporate residency, corporate tax rates, corporate tax base, corporate/shareholder integration, and a few other categories. It questions whether this trend of convergence is still prevailing today.

In this chapter, Jane Gravelle considers a wide variety of ways of increasing corporate income tax revenues. She examines a wide range of base broadening reforms, focusing on those that would raise revenue with minimal effects on existing tax distortions. Gravelle also considers a variety of reforms of the system of international taxation, including a movement to a territorial tax system – although she notes that arguments for such a reform ignore the results of some theoretical models and are likely to overstate the importance of tax effects on multinational decision making. She concludes that the reform proposals that would raise the most revenue with the least distortion are increasing taxes on foreign source income, abolishing the title passage rule, reducing or eliminating interest deductions and the deductions for advertising, and modifying the system so that pass-through entities would be taxed as corporations.

The reform of corporate and business taxation is central to current tax policy debates in the United States. This chapter provides a framework for analyzing reform proposals by describing the lessons from current economic research for business tax reform, addressing both international and domestic reforms within a unified perspective. The chapter begins by identifying ten potential inefficiencies created by the current corporate tax regime. It then discusses three classes of reform proposals. The first involves a substantially lower corporate tax rate and a territorial regime. The second is a formula apportionment system. The third category includes a destination-based cash flow tax. The chapter evaluates each of these proposals in the light of the framework introduced earlier. It concludes that the relatively modest reforms currently under discussion would address only a few of these margins. In contrast, more fundamental reforms would eliminate all or most of the inefficiencies of corporate taxation.

This chapter presents an overview of the U.S. tax system focusing on individual and corporate taxation and how that relates to the taxation of capital and income. Some historical perspective is provided as well evidence on the cross-sectional implications of our tax system.