An historical framework for the Federal taxation of dividend and interest payments in the US

Abstract

This paper presents an historical analysis of the deductibility of interest expense and the nondeductibility of dividend payments by corporations in the US over three distinct periods of tax policy. Many in government, industry and academia have debated the disparate tax treatment between interest and dividends. Given the nature of this debate, this paper seeks to identify the origins of the difference in tax treatment of corporate interest and dividend payments. This study aims to inform policy deliberations by examining events during three periods, namely the Civil War era, the implementation of the Revenue Act 1909 through to 1939, a “watershed year” in US taxation, and the period from 1939 to the present day.