Follow-up: Opting Out of the US Corporate Income Tax

A couple of months ago, I posted on how a growing share of US firms were "Opting out of the US Corporate Income Tax" (December 22, 2014), by instead choosing to incorporate in the form of a partnership or an S-corporation in which the business earnings are only taxed through the individual income tax of the owners. Paul Burnham offers an updated figure on these issues at the blog of the Congressional Budget Office.

The vertical axis includes all business receipts. About 90% of business receipts go to firms that are limited liability corporations; the other 10% would include, for example, a sole proprietor business where the owner remains personally liable for debts incurred by the business. Of the business receipts going to limited liability corporations, Burnham reports that a large share of business receipts ar going to "S corporations and limited liability companies, whose profits are taxed only at the individual level. That shift caused the share of business receipts attributed to C corporations to fall from 87 percent in 1981 to 62 percent in 2011. As a result, federal tax revenues are lower than they would otherwise be, but incentives for investment and the efficient allocation of resources are probably greater."

Discussions of corporate income tax and how to reform it would be wise to remember that the share of business income covered by the corporate income tax is 62% and falling.