Problems with Integrating Corporate and Personal Income Taxes in an Open Economy

This paper analyzes the case for integration in a small open economy when all firms and households exploit tax arbitrage opportunities to the fullest possible (legal) extent. The analysis shows that integration does not accomplish the objectives that have been attributed to it. Instead of eliminating the double taxation of equity income, it simply removes to primary taxation of savings done through the corporation. It has no effect on the investment decisions in an open economy; it is distorted by the corporate tax whether or not there is integration. The analysis also has important implications for the relative desirability of an income versus a consumption tax at the personal level and for the design of the corporate tax itself.