integration

Integration is a feature of tax systems that apply the same effective tax rate to income no matter whether it is taxed inside the corporation or given to shareholders to be taxed as personal income. Integration may be partial or complete. Complete integration would treat corporate income as flowing through to shareholders, while partial integration only treats some income—often from dividends—this way. Integration systems have been implemented, often in the form of a dividend tax credit, in many national tax systems. Forms Integration may be partial or complete. Complete integration occurs when a corporation functions, for tax purposes, as a flow-through entity: all income received by the corporation, whether retained by it or distributed to shareholders, would be treated as shareholders' income. In such a system, according to Sijbren Cnossen, all corporate tax would be treated like a prepayment of individual income tax for which shareholders would be credited on their personal tax returns—regardless of whether property was transferred to them in the relevant taxation period. Partial integration, by contrast, occurs when only some corporate income, often that which is distributed to shareholders as a dividend, is treated as "flowing through" the corporation. Glenn Hubbard describes such a system as "any plan in which corporate income is taxed only once, rather than taxed both when earned and when distributed to shareholders as dividends". There are several ways to achieve partial or full integration. Full integration could be achieved by ending corporate tax, thereby treating all corporate income as shareholders' income by implication. Alternatively, dividend tax might be eliminated, thereby treating all corporate income as income to the corporation instead. Partial integration focused on dividends may occur when shareholders receive a tax credit on dividend income intended to factor in the tax already paid by the corporation on the amount distributed as a dividend. Implementation Historically, both the United States and United Kingdom had tax systems integrated to varying degrees. In the UK, as early as 1799, a corporation could claim a tax deduction from its income because shareholders were taxed on dividend distributions. As of the mid-19th century, federal tax law in the US allowed shareholders to exclude dividends from their income because it was taxed at the corporate level.