Businesses have become increasingly likely to choose the organizational structure that offers more favorable tax treatment. As a result, revenues are lower than they would otherwise be, but incentives for investment are probably greater.
Over the past three decades, businesses have become increasingly likely to choose the organizational structure that offers more favorable tax treatment. Throughout that time, about 90 percent of total business receipts have been earned by firms for which the owners’ liability was limited to the amount they invested (in contrast to sole proprietorships and certain types of partnerships, whose owners are liable for all of that entity’s debts). For businesses in that group, though, a falling share of receipts has been earned by those that are subject to the corporate income tax: called C corporations. Their profits are taxed first at the corporate level and then again to some extent under the individual income tax when profits are paid to investors. A rising share of business receipts has been earned by businesses that are not subject to the corporate tax—including 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.
