Over the past half-century or so, the proportion of corporate stocks held by investors in taxable mutual funds and brokerage accounts has declined dramatically. Steven M. Rosenthal and Livia Mucciolo tell this story.Who is taxed? Initiatives to reduce the shareholder tax base” (Tax payment noticeApril 1, 2024).
Here is their chart showing the breakdown of ownership of shares in US public companies. In the 1960s, 80% of this ownership was in the form of taxable accounts. However, the percentage of U.S. company stocks held by foreign investors and retirement accounts has increased significantly, and nonprofit organizations also own a significant portion of U.S. company stocks. So over the past 20 years, only 20-30% of US company stocks have been in taxable accounts.
Rosenthal and Mucciolo provide additional discussion of how these groups are taxed. For example, dividends paid by U.S. companies are taxable even when paid to foreign investors, but these payments are governed by international treaties. They explain: “However, this tax rate is often reduced by tax treaties between the United States and the foreign investor’s home country. portfolio For example, 5 percent or 0 percent of investment dividends, and dividends from. direct investment” Foreign investors do not pay capital gains on their stocks to the U.S. government; instead, such gains are taxable in their home country. When U.S. companies employ the increasingly common practice of distributing funds to investors through stock buybacks, such payments are treated as capital gains rather than dividends.
Retirement accounts generally aren't taxed when the funds are deposited into the account, nor are they taxed on any earnings that accrue over time. Instead, retirement benefits are taxed as income to the taxpayer when they are received after retirement. Of course, nonprofit organizations are not subject to income tax.
With this pattern in mind, proposals to tax owners of corporate stock as a group, not just taxable intermediaries or minorities holding investments in mutual fund accounts, would be complicated. In politics and economics, dramatic changes to retirement accounts and international tax treaties are no simple matter. Raising taxes on the 20% to 30% of taxable shareholders would create an incentive for shareholders to further depreciate their stocks. Some might argue that the reason for explicitly taxing corporate income is that it has become very difficult to tax profits to the shareholders of those companies.
The authors describe the challenges without elaborating on policy recommendations. They point out that: “The changes in the nature of U.S. stock ownership over the past 60 years, from overwhelmingly domestic taxable accounts to overwhelmingly foreign tax-exempt investors, include how to most effectively tax corporate profits. Who is affected by changes in corporate taxation and the form of corporate dividends to shareholders? Policymakers continue the process of reducing the shareholder tax base. We have to, but this is just the beginning.”