Passthrough Entities: The Missing Link in Business Tax Reform
17 Pages Posted: 13 Jan 2013 Last revised: 11 Sep 2015
Date Written: April 26, 2013
Reform of the U.S. corporate tax system is again on the agenda. Despite important differences, many current proposals share two common goals: (1) reducing the statutory corporate tax rate to improve U.S. “international competitiveness” and (2) broadening the corporate tax base by reducing or eliminating business expenditures to offset revenue losses. Given the significance of the passthrough sector and the relationship between individual and corporate taxes, however, such reforms need to be considered within a broader context. Part I of this article discusses the growing significance of the passthrough sector, which now accounts for roughly half of net business income. Part II explores new incentives for retaining corporate earnings and mischaracterizing labor income that would arise from an increase in individual income tax rates coupled with a simultaneous decrease in corporate tax rates, and considers the feasibility of measures to curb such sheltering within corporations. Finally, Part III urges Congress to look beyond reducing business expenditures to expand the corporate tax base and recommends consideration of an entity-level tax on certain large partnerships.
Keywords: business tax reform, partnerships, capital gains, dividends, S corporations, compensation
JEL Classification: K34
Suggested Citation: Suggested Citation