The rise of pass-throughs
Call it the pass-through revolution.
The U.S. has been losing about 60,000 conventional corporations a year, according to the Tax Foundation. It’s lost 1 million since 1986, the foundation said.
Meanwhile, the number of pass-through entities has exploded.
“More than 60 percent of U.S. business profits are now taxed under the individual income tax code,” and those businesses employ a majority of the U.S. workforce, the foundation said.
In Pennsylvania, there are about 100,000 C corporations, compared with nearly 400,000 S corporations, LLCs and partnerships, according to the Department of Revenue.
Critics say the trend results from the U.S.’s tax structure; in particular, double taxation and high marginal tax rates. Double taxation refers to the fact that dividends are paid out of corporate income.
First the income is taxed at the corporate level, then the portion of the remainder that’s paid out to shareholders is taxed again at the individual level.
For most corporations, marginal federal tax rates range from 34 to 39 percent — among the highest nominal rates in the world.
Pennsylvania’s corporate income tax rate is a flat 9.99 percent, the highest in the U.S. and more than three times its personal income tax rate (3.07 percent).
However, companies often pay much lower effective rates once their (often very complex) deductions and breaks are figured in.
A 2011 study by the Congressional Research Service found that the U.S.’s effective corporate tax rates are about average among high-income countries.
While no one likes taxes, the nitty-gritty of personal and corporate tax rates and tax laws are of particular concern to the wealthy — a big reason why tax battles in Washington, D.C., are so intense.
According to a 2012 Congressional Research Service study, 82 percent of pass-through income goes to taxpayers who earn more than $100,000, and 62 percent goes to taxpayers earning more than $250,000.
