Who Should Pay the Corporate Tax in a Flat Tax World

This article reviews the corporate tax system within the context of the historical bias and current effects of the current system of taxation of corporations and shareholders. Drawing on public finance theory, financial markets microstructure research, and perspectives on corporate governance, Professor Rudnick proposes a profits tax on the liquid equity of firms. She finds this to be a normative rationale for a double tax system under optimal tax principles due to the inelasticity of demand for and supply of liquidity and the economic rent it produces. The value of liquidity in different capital markets is the crucial determinate. Under traditional tax policy criteria of horizontal and vertical equity and efficiency, this approach correctly classifies those firms that can normatively be included in a double tax system after an interest return on equity is deducted. Drawing the line at liquidity allows the fullest expansion of passthrough regimes such as Subchapter S and partnership taxation as well as other forms of integration.