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Michigan Law Review

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Given the current tax rate structure - where the marginal tax rate of some persons exceeds the corporate tax rate and the marginal tax rate of others is exceeded by it - corporations are generally well advised to employ both debt and equity in their capital structures. The former will be held by low tax rate taxpayers and will serve to lower the effective aggregate tax rate6 on the corporation's taxable income. The latter will be held by high tax rate taxpayers and will serve to keep low the effective aggregate tax rate on the corporation's unrecognized economic income (such as any increase in the value of corporate assets, including goodwill). From the vantage of the Fisc, this is, of course, the worst of all possible worlds. This Article does not propose to do away with the infirmities of the current corporate tax regime by abolishing double taxation. For while Code § 11 may be the step child of federal income tax theory, there currently appears to be no realistic prospect to repeal it. At least in the case of publicly traded corporations - the most important class of double-taxed entities - Americans tend to view them either as a free good, which can be taxed with economic impunity, or as a proxy for the faceless rich, who are undertaxed in any event. Perhaps this will change in time, as the proliferation of 401(K) plans turns the hoards of middle class taxpayers into capitalists. But a change seems to be yet a good way off. And in any event, as I argue below, integration - at least in its commonly proposed forms - would not necessarily cure all that ails the current corporate tax system. Thus, this Article takes double taxation as a given and as a challenge. It asks how, if at all, a double tax regime can be designed so that economic actors are powerless to use capital structure to influence tax collections. The linchpin to the answer, set forth in Part VI below, is that the Code cannot allow any nontrivial corporate deduction with respect to any returns earned by any corporate capital providers. In particular, and merely as one example, the corporate deduction for interest expense must be abolished.

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