In January 2016, Senator Orrin Hatch, chairman of the Senate Finance Committee, announced plans for a tax reform that would explore corporate integration. Corporate integration involves the elimination or reduction of additional taxes on corporate equity investment that arise because corporate income is taxed twice. The corporation pays corporate tax (at 35% for large corporations) on its taxable income. Individuals, in turn, pay individual income taxes on dividends and on capital gains (which arise from corporate retained earnings) when realized. This system of taxation produces differential tax burdens, potentially discouraging the realization of gains on the sale of corporate stock and favoring noncorporate equity investment over corporate investment, debt finance over equity finance, and retained earnings over dividends. One goal of corporate integration is to reduce or eliminate these distortions. Work has continued on this proposal. Congress held hearings on May 17, 2016, on allowing a corporate dividend paid deduction and on May 24, 2016, on corporate integration and debt. The focus on corporate tax integration differs from the approach in some recent tax reform plans that have largely proposed broadening the base of the corporate tax, reducing the corporate tax rate, and revising the tax treatment of foreign source income. A number of these elements were addressed in the report of a Senate Finance Committee Working Group in 2015. Former Chairman of the House Ways and Means Committee Dave Camp introduced a corporate tax reform bill ( H.R. 1 ) in the 113 th Congress. A tax reform could combine these elements with an integration proposal. Corporate tax integration was the focus of a major Treasury study issued in 1992. That study recommended approaches to integration that generally reduced or eliminated taxes at the shareholder level while retaining taxes at the corporate level, including an exclusion of dividends for shareholders. Over the years, taxes on shareholders have been reduced. Capital gains, taxed at ordinary rates under the Tax Reform Act of 1986 ( P.L. 99-514 ) and capped at 28% in 1990, were revised in 1997 and taxed at a maximum rate of 20%. In 2003, the President proposed a dividend exclusion for shareholders. Congress instead lowered tax rates on dividends (which had been taxed historically at ordinary rates) and capital gains, with a maximum rate of 15%. These 2003 provisions, along with the 2001 tax cuts, were set to expire after 2010. After some extensions, in 2013 an agreement was reached to retain the lower tax rates on dividends and capital gains but to tax these amounts at high-income levels of 20%. Additionally, in 2010, as part of the Affordable Care Act ( P.L. 111-148 , as amended), an additional 3.8% tax was imposed on investment income, including dividends and capital gains, of high-income taxpayers. Several factors that are important in considering proposals have changed in the almost 25 years since the 1992 study, aside from the lower shareholder taxes that exist today. One of these factors is the increased importance of a global economy and multinational firms with investments and activities in many countries. These firms' choices with respect to the location of investment and profits are affected by firm-level rather than shareholder-level taxes. A second change is that the fraction of shareholders who are not subject to U.S. shareholder taxes has increased, so that currently only about a quarter of corporate stock of U.S. firms is estimated to be owned by shareholders subject to U.S. individual taxes on dividends and capital gains (compared to about half at the time of the study). Inflation and the expectation of inflation have also declined, affecting various relative tax rates. Finally, the growth and recognition of the importance of intangible assets that are tax-favored and are more dominant in the corporate sector affect the relative treatment of the corporate and noncorporate sectors in the aggregate. The next section of the report, " Corporate Tax Differentials Under Current Law ," explains the differential effects of the current system of taxing corporate income. The following section, " Methods of Addressing Corporate Tax Distortions ," outlines the various options for addressing corporate tax integration. The remaining sections address revenue, administrative, and efficiency concerns associated with various options (see " Revenue Concerns ," " Feasibility, Administration, and Compliance Issues ," and " Efficiency and Other Economic Objectives "). This section considers the current treatment of corporate and noncorporate income. The first part of this section explains how the current system produces differential tax rates along different margins, not only by sector or form of finance but also by asset in the presence of tax preferences. The next section provides estimates of the effective tax rate differentials that the current system produces, in preparation for subsequently discussing potential efficiency gains of the options discussed in the following section. Several elements of the U.S. income tax should be considered in analyzing the effects of business taxes, the corporate tax, and various integration options. These elements include how the system potentially taxes income from corporate investments more heavily than income from noncorporate investments, the effect of tax preferences that reduce effective tax rates, how debt is treated, and the treatment of foreign source income. The United States has a "classical" corporate tax system, modified by lower taxes on dividends and capital gains. Corporate taxable profits are subject to a 35% rate for large corporations. Firms then may distribute after-tax profits as dividends or retain earnings for investment. The additional investment of retained earnings causes the value of the firm to increase, creating the potential for capital gains. If all profits were taxed at the statutory rate, distributed as a dividend, and then taxed at ordinary rates to a shareholder in the 35% bracket, the total tax on a corporate investment would be 58% (a 35% corporate tax and an additional 35% on the remaining 65% of profit) compared with a tax rate of 35% on noncorporate investment, for a 23 percentage point difference. Those effects, however, are smaller because of favorable treatment of dividends and capital gains; options to invest stock through tax-exempt accounts, such as retirement plans, that pay no shareholder-level tax; and tax preferences that lower the effective corporate tax rate more than the effective noncorporate rate. Tax treatment at the shareholder level depends on the type of shareholder; as noted above, a recent study estimated that most stock is held in forms not subject to U.S. individual income taxes. Shareholders are treated differently if they are U.S. individuals (24.2%), U.S. tax-exempt entities (50%), or foreign shareholders (26%). Individuals pay taxes on dividends and, if they sell their stock, taxes on any capital gain. Some gain is deferred and sometimes never taxed at all if corporate stock is passed on at death; therefore, overall retained earnings are taxed more lightly than distributed earnings. Because some corporate income is taxed twice, this treatment is referred to as double taxation. This system departs somewhat from the classical system in that tax rates on dividends and capital gains are lower than ordinary rates. Taxpayers with ordinary rates of less than 15% pay no tax on dividends or capital gains; taxpayers with ordinary rates of 25%, 28%, 33%, and 35% pay a 15% rate; taxpayers at the top rate of 39.6% (with $400,000 or more of taxable income for single returns and $450,000 for joint returns) pay a 20% rate. A Congressional Research Service (CRS) study estimates that the average tax rate at the margin on dividends is 14.7% and the average for realized capital gains is 15.4%. Half of capital gains are estimated not to be subject to tax because the gains are passed on at death, and thus the effective tax rate is 7.7%. Weighting the two tax rates by their estimated income shares results in an overall individual shareholder tax averaging 11.6%. The 11.6% is not the additional tax, since it is applied to income net of the corporate tax rate. As will be discussed subsequently, this rate should be the effective corporate tax rate, which varies by investment; if corporate profits were taxed at 35%, the additional tax would be 11.6% times (1-0.35), or 7.6%. This calculation does not include the 3.8% tax on investment enacted by the Affordable Care Act. Based on estimates that about 56% of dividends and capital gains on corporate stock are subject to the tax, the additional tax rate would be 2.1%. After interacting with a 35% tax rate, the rate would be 1.4%. The combined average marginal tax rates for dividends and capital gains are 16.8% and 17.6%. A large share of corporate income (estimated at 50% of the total) is not taxed at the shareholder level because it is held in tax-exempt, or largely tax-exempt, form, such as pensions, individual retirement accounts, annuities, and life insurance. Some shares also are held by nonprofits, such as endowment funds of universities and colleges or foundations. Overall, pensions and individual retirement accounts are 37% of the total, nonprofits are 5%, and the remainder is largely insurance assets in annuities and whole life insurance. Foreign shareholders that hold portfolio shares of U.S. firms account for 26% of portfolio shares. The study of the distribution of shares did not include direct investment of foreign corporations through investments in U.S. subsidiaries, which is 79% the size of portfolio holdings by foreign persons. Foreign shareholders are estimated to pay only a negligible amount of U.S. tax, although they may be subject to taxes on capital gains and dividends in their home countries. Dividends are subject to a 30% withholding tax, which can be reduced or eliminated by treaty. Based on Internal Revenue Service (IRS) data for 2011, the average withholding tax on dividends was 5.9%. Capital gains are not taxed, so the overall withholding tax rate is estimated at 3.4%.