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1 Kyle Pomerleau, Individual Tax Rates Impact Business Activity Due to High Number of Pass-Throughs 1 (2013)

handle is hein.taxfoundation/ffdjexz0001 and id is 1 raw text is: September 2, 2013 No. 394 Individual Tax Rates Impact Business Activity Due to High Number of Pass-Throughs By Kyle Pomerleau Introduction Support for lowering the corporate tax rate-now the highest in the OECD-has been expressed by both Democrats and Republicans in order to improve the competitiveness of American businesses. However, they differ in their plans for the individual tax code. While Republicans have proposed lowering the top individual rate from 39.6 percent to 25 percent, in parity with the proposed corporate tax rate, Democrats are less willing to consider lowering the individual tax rate.1 The implications of these policy differences are considerable because of the tremendous growth in non- corporate business forms over the past thirty years. Today, there are vastly more non-corporate businesses than traditional corporations and they now earn more net income than traditional corporations. These businesses face top marginal tax rates higher than 50 percent in some states. Thus, ignoring the top individual tax rate-even while lowering the corporate rate-means the United States will continue to expose a broad swath of business to high tax burdens. Trends To understand the impact of higher tax rates on business income, it is instructive to look at the tremendous growth in taxpayers reporting business income over the past three decades as sole proprietors, S corporations, limited liability corporations (LLCs), and partnerships. These non-corporate firm types are often referred to as pass-through entities because the firm's profits are passed directly through to the owners and taxed on the owner's individual tax return. By contrast, the profits of traditional C corporations are taxed at the corporate level first before being distributed to the owners (shareholders) who are then taxed again at the individual level. Number of Pass- Through Businesses Tripled While Number of Corporations Declined Between 1980 and 2010, the total number of pass-through businesses nearly tripled, from roughly 10.9 million to 30.3 million.2 Specifically, as Figure 1 indicates, the number of sole proprietors grew from 8.9 1Michael M. Gleeson & Lindsay McPherson, Schumer Says Tax Reform Shouldn't Lower Top Individual Rate, TAx ANALYSTS, Aug. 2, 2013. 2 When we reference tax return data, business income is considered the sum of income reported on schedules C, E (excluding royalty and estates), and F. See Internal Revenue Service, Statistic On Income Tax Stats-Individual Income Tax Return (Form