Growth in Passthrough Entities and Terminology

A January 10, 2012 article in the Wall Street Journal caught my attention by the title - "More Firms Enjoy Tax-Free Status" by McKinnon. It explains the trend of the past few decades of the growth in passthrough entities and slight decline in the number of corporations. The graph included in this post is from the report the Joint Committee on Taxation presented to the Select Committee that was unable to find a way to reduce our growing deficits (JCX-49-11). The trend is a good reminder that taxpayers do respond to changes in the tax law. The key change was the Tax Reform Act of 1986 that dropped the top individual rate (28%) to below the corporate rate (34%).  I think this means that it is a good reminder that the reverse may occur if the corporate rate is dropped below the top individual tax rate.

At one of the 2011 hearings on tax reform (I believe it was the 3/3/11 hearing on small businesses), the question was raised as to whether some very large passthrough entities should be taxed as corporations. That led to the introduction of S. Res. 88 calling for entitles to be able to chose their form.

Comments:

• The WSJ article title is too catchy - passthrough entities do pay taxes, that is, the owners pay taxes.
• While there are a lot more passthrough entities than C corporations, the gross receipts picture is an opposite one.  Check my data page - here.
• Why not talk about business tax reform rather than just corporate tax reform.  Or perhaps it should be business reform for those that are not sole proprietorships and have receipts above $500,000. After all, there are a lot of small businesses where the owners are not in the top tax brackets.
• How will we pay for lower tax rates?  Will the offsets hurt businesses, such as moving to slower depreciation methods and longer lives?

What do you think about all of this?