Pass-Through Businesses: The Predominant Structure of American Businesses

From the Desk of Lauran L. Stevenson

There is a lot of focus on reforming the federal corporate income tax. However, most businesses in the US are not subject to corporate income tax at all. In fact, over 90% of the businesses in the US are pass-through businesses where income is reported on the owner’s tax returns and is taxed under the individual income tax.

Over the past thirty years, the pass-through business sector has expanded significantly. Pass-through businesses now earn more net income than traditional C corporations and employ most of the private-sector workforce. On the federal level, pass-through businesses are subject to a top marginal tax rate of 44.6 percent. This means that, in most U.S. states, pass-through businesses can face marginal tax rates that exceed 47 percent. There have been arguments for taxing some large pass-through businesses as C corporations. However, there are strong theoretical and economic arguments for the current tax treatment of pass-through businesses, which are not subject to the problematic double tax regime faced by C corporations. The stronger argument would be for the inverse, where the tax code treated C corporations more like pass-through entities instead of forcing some pass-through entities into the double tax regime that is in dire need of reform.