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 pay individual income taxes on dividends and capital gains (which arise from corporate retained earnings) when realized. This system 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. The focus on corporate tax integration differs from the approach in some recent tax reform plans that have proposed broadening the base of the corporate tax, reducing the corporate tax rate, and revising the tax treatment of foreign source income. This report provides an overview of CRS Report R44638, Corporate Tax Integration and Tax Reform , by [author name scrubbed], which contains a detailed analysis of corporate tax integration issues, data sources, and documentation. Corporate tax integration was the focus of a 1992 Treasury study, which recommended approaches to integration that 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. Dividends and capital gains are typically taxed at rates of 15% or 20% (whereas the top ordinary income tax rate is 39.6%), plus, for some high-income taxpayers, an additional 3.8% tax that applies to passive investment income in general. Several important factors in considering proposals have changed since 1992, aside from the lower shareholder taxes. One is the increased importance of a global economy and multinational firms with investments and activities in many countries. These firms' choices about the location of investment and profits are affected by firm-level rather than shareholder-level taxes. A second is that the fraction of shareholders who are not subject to U.S. shareholder taxes has increased. Currently only about a quarter of the corporate stock of U.S. firms is estimated to be owned by shareholders subject to U.S. individual tax (compared with about half in 1992). Inflation has declined, affecting tax rates. Tax-favored intangible assets, which are more important in the corporate sector, have also grown in importance. 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 distribute after-tax profits as dividends or retain earnings for investment; the latter increases the firm's value, creating 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 (the top rate is 23.8%); 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, most stock is held in forms not subject to U.S. individual income tax. Shareholders are treated differently if they are (1) U.S. individuals (a 25% share), paying an estimated tax rate of 13.7%; (2) U.S. tax-exempt entities and tax deferred entities (a 50% share) paying no tax, or (3) foreign shareholders (a 25% share) paying a 3.2% estimated U.S. tax rate. The tax rates at the shareholder level are paid on income net of the corporate effective tax rate (estimated to be about 20% overall for new investment). The data on shareholder distribution do not include U.S. subsidiaries of foreign firms, whose holdings are estimated at 79% of the holdings of foreign shareholders in U.S. parented firms. Income of pass-through (referred to as noncorporate) businesses is subject only to the individual tax, with income allocated to each owner. These firms include sole proprietorships, partnerships (including limited liability corporations), and Subchapter S firms that are corporations but elect to be taxed as pass-throughs. The overall statutory tax rate is estimated to be 28% (although the effective rate is lower). In determining the effect of the business tax system and in designing integration proposals, an important issue is that of tax preferences: provisions that cause the effective tax rate to be less than the statutory rate. The most important tax preference that affects burdens on domestic investment is accelerated depreciation, which allows deductions for costs to be recovered faster than is justified by the economic decline in the value of the asset (including an immediate deduction for investment in intangibles). Other preferences are the production activities deduction, which allows a deduction for domestic production in certain industries, and the tax credit for intangible investment in research. Foreign source income is also taxed at a lower rate. If firms borrow to finance investments, the interest is deducted. The deduction of interest goes beyond eliminating the corporate tax on profits attributable to debt finance, because the rate at which profit is effectively taxed is lower than the rate at which interest is deducted due to tax preferences and inflation. Interest income, including the inflation portion of the nominal interest rate, is subject to tax by creditors, but the tax rates are lower than the corporate rate (estimated at 24%). In addition, only a small fraction of that interest, 19%, is estimated to be subject to tax. Interest paid to foreign persons is subject to a negligible withholding tax. The growth in the importance of foreign source income has changed the way corporate integration is viewed, compared with the focus in 1992. The U.S. corporate level tax is largely imposed on a source basis, reflecting the taxes in the jurisdiction where the activity takes place. Thus, a lower corporate tax generally encourages more equity (although not necessarily debt-financed) investment in the United States as compared with foreign countries. The shareholder and creditor taxes are imposed on a residence basis and apply regardless of investment location. The corporate tax is technically imposed on worldwide income, but tax is not paid on the earnings of foreign subsidiaries in most cases until and if income is repatriated (or paid as a dividend to the U.S. parent). Because a fraction of profits is reinvested permanently (as plant and equipment), some share of this income is never taxed. In addition, foreign source income is eligible for credits against U.S. tax liability for taxes paid to foreign governments. Because excess credits from higher-tax countries can be used to offset U.S. tax liability from low-tax countries, the U.S. effective tax rate is small. Overall, the average tax rate paid on foreign source income is estimated at 17.4%, 14.1% paid in foreign taxes and a residual tax of 3.3% paid to the United States. One objective of corporate tax integration is to reduce the distortions caused by the current tax treatment. The estimated magnitude of the distortions arising from the corporate tax and other elements of the tax system can be shown through effective tax rates on the returns to new investment at the margin. Estimates presented are the effective corporate tax alone (the firm-level tax), an effective total corporate tax including shareholder or creditor taxes, and an effective tax rate on unincorporated businesses including all taxes. Table 1 shows the effective tax rates using the basic assumptions about shareholder and noncorporate average statutory tax rates and the Congressional Budget Office's (CBO's) alternative set of assumptions of these statutory tax rates. For domestic equity investments, the overall effective tax rate at the firm level is estimated at 19.7%, or only 56% of the statutory rate of 35%. Across groups of assets, tax rates range from -63.3% for intangible investments in research to 30.8% for nonresidential structures. These rates compare to estimated marginal rates on foreign investment of 13%. Additional shareholder taxes add less than three percentage points. The total corporate tax rate is estimated at 22.4%, only slightly above the rate on unincorporated business of 21.1%. Returns on debt-financed investment in the corporate sector are subject to firm level negative effective tax rates of -53.5%; shareholder tax rates lower the negative tax (or subsidy) to -44%. The return on investment by unincorporated business is estimated to have a negative tax rate of -20.6%. A weighted average of debt and equity has a firm-level tax of 5.7%, an overall corporate tax rate of 7.8% and a rate on unincorporated business of 11.8%. These estimated rates show a small difference in tax burden overall between equity invested in the corporate versus the noncorporate sector, but show large differences across assets and large differences between debt and equity. Under current law, the incentive to retain earnings because part of capital gains (estimated at half) generated by those earnings escapes tax is small, both because of the low rates and the significant share of stock held by nontaxable entities. For individuals subject to the income tax, the estimated tax rate is 17% and half of that rate is 8.5%. For foreign shareholders, dividends are taxed at 5.9% on average and capital gains are not taxed, so the differential is 5.9%. Weighted for all taxpayers the difference between the tax on dividends and capital gains is 3.6%.