Over the last half-century or so, the share of corporate stock that is owned by investors with taxable mutual funds or brokerage accounts has fallen dramatically. Steven M. Rosenthal and Livia Mucciolo tell the story in “Who’s Left to Tax? Grappling With a Dwindling Shareholder Tax Base” (Tax Notes, April 1, 2024).

Here’s their figure showing a breakdown of who owns stock in US publicly traded corporations. Back in the 1980s, 80% of this ownership was in the form of taxable accounts. However the share of US corporate stock held by foreign investors and retirement accounts has risen substantially, and nonprofits own a chunk of US corporate stocks as well. So in the last two decades, only 20-30% of US corporate stock is in taxable accounts.

Rosenthal and Mucciolo offer some additional discussion of how these groups are taxed. For example, dividends paid by US firms are taxable, even when paid to foreign investors, but these payments are governed by international treaties. They explain: “However, the rate is often reduced by tax treaties between the United States and the home country of the foreign investor: from 30 percent to 15 percent on portfolio investment dividends, for example, and 5 percent or even 0 percent on dividends from direct investments.” Foreign investors do not pay capital gains on stocks to the US government–instead, such gains are taxable in their home country. If US firms use the increasingly common practice of distributing funds to their investors by repurchasing their shares, then such payments are treated as capital gains, not dividends.

For retirement accounts, the common practice is that the money is not taxed when it goes into the account, and the returns are not taxed as they occur over time. Instead, retirement money is taxed as income to the taxpayer when it is received after retirement. Nonprofit, of course, is not subject to income taxes.

With these patterns in mind, proposals for taxing owners of corporate stock as a group–not just the minority who hold their investments in taxable brokerage and mutual fund accounts–are going to run into complexities. Dramatic changes in retirement accounts or international tax treaties are not a simple matter, in politics or economics. Jacking up taxes on the 20-30% of shareholders who are taxable would created incentives to push their share even lower. One can make an argument that a reason for an explicit tax on corporate income is that it has become so difficult to tax the gains to shareholders of those firms.

The authors describe the challenges without trying to spell out policy recommendations. They note: “The transformation over the past 60 years in the nature of U.S. stock ownership from overwhelmingly domestic taxable accounts to overwhelmingly foreign and tax-exempt investors has many important policy implications, including how we can most effectively tax corporate profits; who is affected by changes in corporate taxation; and the form of corporate payouts to shareholders. Policymakers must continue the process, only now beginning, of grappling with the dwindling shareholder tax base.”

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