What is corporate integration?
Corporate integration is a way of addressing the issue of “double taxation” on corporate income. Under our current system, corporate income is taxed at two levels: the level of corporate profits and the level of shareholder dividends.
A common solution that is offered for addressing double taxation is to integrate the corporate and individual income tax systems to treat corporations and shareholders as a single entity for taxation purposes (rather than two separate entities). The two most-often discussed options for achieving integration are the imputation credit system and the dividend deduction system.
The imputation credit system would have the corporation and the shareholder both pay a portion of the corporate income tax, and provide the shareholder with a tax credit to offset the taxes already paid by the corporation.
The dividend deduction system would give a tax deduction to corporations for the corporate taxable income on dividends that are paid to shareholders.
Both of these methods lead to identical results, but differ in perceptions of equity and fairness in the corporate and individual income tax structures. For example, under the imputation credit method, individuals receive tax credits—which could affect the perceived progressivity of the individual income tax code. Under the dividend deduction method, there is not an impact on the individual income tax, but rather the impact would be on the corporate tax code. These perceptions give shape to the political debate around which approach should be implemented.
How might corporate integration impact philanthropy?
Of the two methods for integration, the imputation credit system could—and likely would—have an impact on foundations and some charities. Under this method, shareholders receiving dividends from a corporation receive a tax credit to offset the taxes already paid by the corporation.
However, most versions of the imputation system do not provide this tax credit for tax-exempt shareholders—therefore causing these tax-exempt shareholders (foundations and charities with investments in corporations) to implicitly continue paying this tax, whereas non-tax-exempt shareholders would not.
The ability of endowed philanthropy to advance the common good depends, in large part, on a strong investment portfolio. Implementing the imputation credit method to avoid the double taxation of economic activity would create a system where organized philanthropy shoulders a heavier tax burden than its non-tax-exempt counterparts—indirectly upholding a tax on economic activity, albeit a different—but equally important—type of economic activity.
What should we be doing about it?
The Council on Foundations is acutely aware that certain forms of corporate integration could negatively impact the philanthropic sector, and is working directly with Chairman Hatch and his staff—urging him to address concerns that would be raised by these developments in his forthcoming proposal.
We also continue to analyze all issues surrounding corporate integration, and will provide additional insights in the coming days.