Abstract
The double tax imposed on the earnings of C corporations results in significant economic inefficiencies because of its effect on the choice of entity for conducting a business. All other items being equal, the double tax distorts taxpayers' choice of entity because it motivates taxpayers to favor flow-through entities when they otherwise would not. The reduction in the corporate and individual tax rates in the legislation popularly known as the Tax Cuts and Jobs Act of 2017 (the "2017 Tax Act") has been in part justified on the grounds that the rate changes would help achieve parity between effective tax rates imposed on C corporations and on flow-through entities.
This Article suggests that the 2017 Tax Act has not achieved this goal. To illustrate, this Article focuses on three changes made by the 2017 Tax Act-the reduction of the corporate tax rate to 21%, the reduction of the maximum individual tax rate to 37%, and the allowance of a 20% deduction in Code section 199A for "qualified business income." It shows that the interaction of these changes with three existing factors (a corporation's ability to retain earnings, the rate of return on those earnings, and the 3.8% Medicare surtax) have increased the complexity in selecting between a C corporation and an entity taxable as a partnership. As discussed below, depending on the mix of these factors, the effective tax rate for a partnership will be less than, equal to, or greater than the effective rate for a C corporation. As a result, the 2017 Tax Act has made tax planning more important in selecting an entity to conduct a business, not less.
Recommended Citation
Repetti, James R.
(2018)
"The Impact of the 2017 Act's Tax Rate Changes on Choice of Entity,"
Florida Tax Review: Vol. 21:
No.
2, Article 5.
Available at:
https://scholarship.law.ufl.edu/ftr/vol21/iss2/5