Revisiting the Corporate Tax Debate: The Role of Economic Rents and Flexibility

• In Event: Taxes and Choice of Entity

Abstract

One of the longest running debates in tax is whether business income should be taxed at the entity level or passed-through to the owners of the firm. In this paper, we explore how two important recent trends bear on this debate.

The first trend is the gradual convergence of U.S. business taxation toward a cash flow tax, which focuses the tax on economic rents. We argue that some of the usual advantages of pass-through taxation—particularly the ability to tax capital income at more individuated rates—are attenuated under a cash flow tax compared to a pure income tax.

The second trend is the growing share of income earned by complex partnerships, and the gradually weakening enforcement against such complex business entities. In a world with weaker enforcement of such large, complex firms, an additional perk of entity taxation becomes more salient: its simplicity and legibility from the standpoint of tax administration, which mitigates the distortions and revenue losses from complex rules that are more easy to game or evade.

Authors

• Edward Fox, University of Michigan

• Michael Love, Columbia Law School

• Zachary Liscow, Yale Law School