Wednesday, March 19, 2014
Martin J. McMahon, Jr. (Florida) presents Reforming Taxation of Privately Held Businesses at Duke today as part of its Tax Policy Seminar hosted by Lawrence Zelenak:
Recent proposals to reduce the corporate tax rate and to clean up the base by eliminating tax expenditures are appropriate, but none adequately address the differential treatment of incorporated and unincorporated businesses. Corporate tax reform that involves broadening the base and reducing the rates cannot thoughtfully be addressed without also reconsidering the taxation of unincorporated businesses, in light of the large and increasing percentage of business income realized by unincorporated businesses. Leaving business-related tax expenditures in place for unincorporated business while repealing them for corporations would increase both statutory complexity and planning complexity. Such a change would alter (in a manner that is difficult to describe precisely) the tax-induced distortions in the choice of business entity and most certainly continue the economic inefficiencies attributable to the current system.
My proposed solution would be to tax all businesses (including wholly owned corporations and limited liability companies, as well as unorganized sole proprietorships), at the entity level under a uniform rate schedule, regardless of the form of organization. This proposal emanates from decades long problems with the administration of Subchapter K, governing the taxation of partnerships, and the incoherence of having three separate regimes—Subchapter C, Subchapter K, and Subchapter S—apply to closely held businesses depending of the form of organization and available elections.