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Matt Lykken

January 20, 2011

Matt Lykken, Statement

I am the Director of I thank the Committee for the opportunity to submit this statement with regard to the economic burdens imposed by the current tax system and the possibilities for helpful reform.

I am an international tax attorney with 24 years of government and corporate experience. I have worked for U.S. corporations in the U.S. and abroad, and for a foreign corporation following the acquisition of my U.S. employer. I have advised several foreign governments on how to structure their tax systems in a manner that would provide strong and secure revenue while at the same time encouraging investment. My colleagues in are likewise tax attorneys of broad experience. As tax professionals and parents, we have become alarmed by the clear negative effect that the U.S. corporate tax system is having upon the U.S. economy. The current system discourages U.S. employment, inhibits repatriation of hundreds of billions of dollars, and strongly interferes with efficient investment. Further, compared with taxation of the same earnings at the individual level, corporate tax is regressive, imposing the same 35% levy on earnings allocable to the IRA of a minimum wage worker as it does on earnings allocable to a billionaire. The United States can no longer afford this efficiency burden. We seek to offer an alternative that is revenue neutral in the short term, revenue positive in the longer term, and helpful to the working, saving middle-income families who have been suffering from artificially low interest rates on their savings and have been standing aghast as our government commits their hard-earned money to helping the rich and the spendthrift.

A Right and a Wrong Way to Reform Deferral

The Administration is right to wish to reform deferral. Under the current system, a corporation can increase its after tax manufacturing profits by 54% simply by choosing to locate a plant in the Dominican Republic (“D.R.”) rather than in the United States. Further, when the corporation then determines how best to invest $1,000,000 of that D.R. profit, it must consider that it can invest the full $1,000,000 if it does so in any country except the United States, but can only invest the after tax amount of $650,000 if it brings the cash here. Clearly, we should seek to alter this incentive. However, attempting to do so by simply taxing foreign earnings at 35% would have an extremely destructive effect given the existence of global competition.

The Wrong Way

The United States does not have a monopoly on technology, creativity, or capital. Virtually all U.S. multinationals have strong foreign based competitors. Those competitors are free to set up their plants in the D.R. and pay no tax, and under their home country territorial tax regimes they will never pay tax on those earnings. (As one Example, Bayer AG in 2007 had tax expense of €72 million on income of €2,234 million). In the global economy, shareholders demand an equivalent post-tax return from any corporation having an equivalent growth and risk profile. If a fully-taxed U.S. corporation is forced to compete with an untaxed foreign rival, then, two things can be expected to happen. First, the foreign company may choose to compete on price, relying on the fact that it would only need to earn $65 of pre-tax profit to be equivalent to a 35% taxed U.S. rival earning $100.   The U.S. company may not be able to make a reasonable profit in the face of that disadvantage, and may be crushed or seek to withdraw from the competition. This raises the second effect. If the D.R. operations would be worth $1,000 on a 0% tax basis, they would be worth only $650 on a 35% tax basis. Therefore, a 0% taxed rival could buy the D.R. operations of a U.S. parent without tax friction. In other words, it could pay $1,000 because the operation would be worth $1,000 to it, the U.S. seller would receive $650 after tax, and so both sides would be content. Faced with the choice between hopeless competition or a frictionless sale, which would the U.S. corporation choose? Could a 35%-taxed U.S. corporation buy out its 0% taxed D.R. rival? No. Going in that direction, the fact that tax basis can only be recovered over time imposes a level of friction that would be impossible to overcome. Using a typical 15 year recovery period and a typical 15% discount rate, the U.S. company would be paying $1,000 for an operation worth only $796 to it. In short, existing foreign operations of U.S. parents would die or be sold, new operations would not be acquired, and U.S.-based operations would labor under the burden of unfair price competition. Many U.S. corporations would be acquired by foreign rivals, with the consequent elimination of prime U.S. headquarters jobs and elimination of U.S. export operations, further aggravating our balance of payments. This is not a formula for American success.

The Right Way

This Committee may hear a number of proposals for corporate tax reform. They will have various known flaws. The Committee will be asked to lower corporate tax rates. That is an extremely prudent suggestion given that the U.S. tax rate is now a global outlier, but substantial rate reduction will increase the earnings lock-in effect and will bring back all of the personal income sheltering issues that were suppressed when corporate and individual rates were brought into harmony. The Committee will hear calls for conversion to the type of territorial tax regime used by essentially all of our trading partners, but that also has recognized issues. The Committee may receive radical reform proposals that raise the risk of a fresh “arms race” between tax planners and the government, losing the protection of a long-tested system of extracting revenue. But there is one proposal that would eliminate the deferral problem in a manner that would encourage U.S. investment and strengthen U.S. corporations. It would make corporate tax-shelter and transfer-pricing issues a thing of the past. It would eliminate corporate cash lock-in and free funds for investment in the best opportunities available in the overall economy. It would drive true corporate transparency and accountability, reduce corporate power and “too big to fail” consolidations, and shift focus from mindless growth to solid profitability. It would reduce the hidden harvest of corporate profits by executives and give those funds back to the shareholders. It would improve the progressivity of the U.S. tax system and reward middle-income savers, increasing the value of their hard-hit IRA and 401(k) accounts. It would do this is a manner that would be revenue neutral on a static basis, and strongly revenue positive in the future as increased after-tax earnings are withdrawn from retirement accounts. And it would do all of this with a three page bill, included here.

The Shared Economic Growth proposal is simply a corporate dividends paid deduction with the revenue offset at the individual shareholder level. The United States has always sought to achieve corporate integration by reducing tax at the shareholder level, a highly regressive technique that pleases large campaign contributors. Shared Economic Growth instead allows corporations to reduce their tax only if and when they pay out their earnings as dividends, and simultaneously taxes those dividends in the hands of the shareholders at full ordinary rates. Certain other changes to the system that are possible only with the introduction of a dividends paid deduction (i.e. not with a corporate rate reduction or shareholder level relief) make this work in a revenue neutral manner. Shared Economic Growth could be implemented in two alternative ways, offering a policy choice. Because a portion of corporate dividends flow to tax-deferred savings vehicles such as IRAs and 401(k)s, there would be a current revenue loss. The version of the bill attached here assumes that this Committee would prefer to allow that deferral and to make it up through a levy on individual income over $500,000 a year equal to the individual employment tax levy that ordinary wage earners pay. Under this version, as the IRAs and 401(k)s pay out their enhanced earnings in the future, the government would harvest substantial incremental revenues that could be used to reduce the deficit. Alternatively, one could enact the proposal with a withholding tax that would hold tax-deferred savings accounts neutral while still obtaining all of the incentive-correction and efficiency effects of the proposal and still somewhat increasing progressivity.

Further information on the proposal, and on the impact of the current system on our economy, can be found at

Given This Option, Enacting Destructive Changes Would Be Inexcusable

Shared Economic Growth is a viable option. It is simple. The static numbers are based on IRS Statistics of Income and Federal Reserve data and are valid. It is safe. It would strengthen the American economy, bring home hundreds of billions of dollars of corporate cash, and enhance the market power of American employees, all while satisfying the Administration’s revenue requirements over time. With such an option available, there is no good reason to further damage U.S. stock values by even considering the destructive alternative of attacking deferral under our current flawed system.

This is a critical moment in America’s history, one where the choices made by Congress will determine whether our children will have a chance for a joyous and prosperous future or will be doomed to fight for their share of a wounded and diminished economy. I thank you for investing the time to ensure that you have thoroughly considered all of the options so that you may make the right choices for America.


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.


This Act may be cited as the “Shared Economic Growth Act of 2011”.


(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, 2012.

(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, 2011. 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, 2011.

(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, 2011.

(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, 2011. 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.


(a) Section 1441 of Subchapter A of Chapter 3 of Subtitle A of the Internal Revenue Code of 1986 is amended by adding at the end of subsection (a) thereof:

“, and except that in the case of dividends, the tax shall be equal to 35 percent of such item.”

The imposition of this 35 percent withholding tax on dividends shall override any contrary restriction in any existing income tax convention.

(b)Section 1442 of Subchapter A of Chapter 3 of Subtitle A of the Internal Revenue Code of 1986 is amended by adding at the end of the first sentence of subsection (a) thereof:

“, except that in the case of dividends, the tax shall be equal to 35 percent of such item.”

The imposition of this 35 percent withholding tax on dividends shall override any contrary restriction in any existing income tax convention, except that any treaty limiting the imposition of U.S. tax on dividends paid from a U.S. resident corporation to a foreign parent corporation shall not be overridden where the foreign parent owns, directly or indirectly, at least 80 percent of the voting stock of the U.S. corporation and where the foreign parent is 100 percent owned, directly or indirectly, by a corporation whose ordinary common shares possessing at least 51 percent of the aggregate voting power in the corporation are regularly traded on one or more recognized stock exchanges. 


(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.

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 2006, a normal year, corporations paid tax of $353 billion, so offsets of up to $353 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 2013 individual rates. Subsection 2(e) repeals these special rates. Per the Joint Committee on taxation 2006-10 tax expenditure report, this would have provided an offset of $92.2 billion for 2006 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. As is noted below, the bill provides substantial excess offsets, so select non-equity capital gain rate benefits could be retained if desired.

Subsection2 (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 2013 rate taxation of the dividends needed to reduce corporate tax to zero would be some $153.6 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 35% incremental withholding tax on dividends paid to foreign portfolio holders, exemption certain qualified foreign parent companies. This offset figure is somewhat inflated because I lack data to sort out the portion attributable to qualifying foreign parents corporations versus portfolio investors.

Section 4 provides the final offset, which the draft bill sets at a much higher level than necessary, since there is a certain attraction in subjecting individual income over $500,000 a year to an AGI tax equivalent to the individual portion of the FICA taxes that ordinary wage earners pay. The minimum level needed for this levy is some 2.65%. At a 7.65% level, 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. Moreover, because these retirement savings will ultimately be paid out and taxed (at an average rate of some 17.66% after exclusions (as computed from the 2006 IRA/pension/annuity distribution income by AGI class), this would increase revenue by some 22.2 billion per year on a static basis as the pension income is paid out. Use of a 7.65% rate provides an excess offset of $67.6 billion that can be used to reduce the other offsets or to provide other compensating benefits or deficit reduction.

The static computations, based on 2006 IRS, JCT and Federal Reserve data, are reproduced in summary below and are available in full on request. I should note a computation relating to a variant from the static model. The static model ignores the fact that if corporations pay out a higher share of their earnings as dividends, capital gains taxes that would otherwise be payable under current law would be reduced, since a portion of capital gains tax collections pertain to gains flowing from the increment in share values attributable to retained earnings. The sensitivity computation below shows that at worst this effect would not be large enough to invalidate the model. The static model already conservatively accounts for taxes payable under current law on dividends that are normally distributed. The maximum effect of the above-described capital gains interaction is thus computable based upon the incremental taxable dividends as computed in the model. This results in the following computation.

Maximum reduction in capital gains tax due to elimination of capital

gains attributable to earnings that would otherwise be retained

Incremental dividends subject to tax


Times 65% to account for earnings reduction from corp tax under current law


Times 20% maximum capital gains rate


This is less than the excess offset



This computes the necessary offsets, based on IRS 2006 SOI data and Federal Reserve ownership data

Total corporate tax collected


Foreign tax credits used


Incremental tax if FTCs replaced by deductions


Adjusted corporate tax for computation


Grossed up by dividing by 35% to obtain value of dividends required to reduce corporate tax to zero


Qualifying taxable dividends reported by shareholders


Percentage of stock held by retirement funds


Percentage of stock held by state & local gov’t


Percentage of stock held by foreigners


Total dividends % not subject to income tax


Implied non-taxable dividends paid


Incremental dividends to reduce corporate tax to zero


Incremental dividends subject to tax


Individual tax on those incremental dividends


Remaining offset needed


35% withholding on foreign shareholders


Remaining offset needed


Capital gains & dividends rate benefit


Remaining offset needed


2.65% AGI tax on income > $500,000


Remaining offset needed


Note: At an AGI tax of 7.65% on income over $500K,

there would be an excess offset of


allowing plenty of room to tweak the other offsets

Based on 2006 IRA/pension/annuity distributions, the

dividends going to pension funds will ultimately be taxed


at a weighted average rate after exclusions of


Producing tax of


Of which the incremental amount produced by SEG would be