Taxing Private Enterprise in the New Millennium

Abstract:     
This article develops a system for subjecting the income of all private enterprises to a single layer of tax. This new system distinguishes simple private enterprises from complex private enterprises, rather than discriminating among different state law forms. The article proposes that Subchapter K should cease to accommodate complex economic arrangements. If these arrangements were denied access to Subchapter K, many intricate rules designed to impede tax avoidance efforts could be eliminated. The resulting simplified version of Subchapter K could be melded with Subchapter S and thereby dramatically simplify the taxation of all non-publicly traded enterprises. The new owner-level tax regime would apply to all simple private enterprises regardless of legal form. As to complex private enterprises, the tax law should refrain from engaging in the contortions required to sustain a system that refrains from taxing the enterprise. Instead, a tax should be imposed on the business entity when income is earned. No additional tax should be imposed on the owners when distributions occur. The new entity-level tax should apply to all complex private enterprises regardless of legal form.

Keywords: Subchapter K, Subchapter S, non-publicly traded, private enterprise, closely held businesses, closely held corporations

JEL Classifications: H20, H21, H25, H26, K34

Accepted Paper Series