The Reinvestment Deduction: A Modest Proposal to Reform the Taxation of Business Income

This essay recommends enactment of a deduction to individuals for promptly reinvested distributions received on corporate equity and gains derived from the sale or exchange of corporate equity. The reform is largely efficiency-oriented. The proposal also moves in the direction of more-comprehensive reform for which I have argued elsewhere. In a recent essay, I advocated the adoption of a uniform tax on all business income along the lines of the comprehensive business income tax, or CBIT, that the Treasury Department proposed in 1992.

Part I outlines the basics of the proposal, Part II discusses its efficiency properties with respect to the bias against investment in the corporate sector, and Part III considers additional behavioral effects that may arise at the corporate level.