Taxing Businesses

Taxing Businesses: Lowest Marginal Rate

Part 3 of a series about Taxing Businesses

Combining the different scenarios from the previous two posts in the series, I highlighted the lowest marginal rate available to US businesses (one version with pass-though business income taxed as earned income the second taxed as unearned income). These graphs, showing how different business structures are taxed a different top rate and that the business structure that offered the lowest marginal rate has changed over a 99-years.


Lowest Marginal Rate: Earned Income Scenario

  • After 1970, pass-through businesses taxed as earned income via the individual tax code offered the lowest marginal rate.
  • 1935-1939; 1952-1970 the lowest option was the effective top rate on C corporate profits & capital gains. 
  • Before 1935; 1940-1951 the lowest option was the effective top rate on C corporate profits & dividends. 

Lowest Marginal Rate: Unearned Income Scenario

  • After 1981, pass-through businesses taxed as earned income via the individual tax code offered the lowest marginal rate.
  • 1935-1939; 1952-1981 the lowest option was the effective top rate on C corporate profits & capital gains. 
  • Before 1935; 1940-1951 the lowest option was the effective top rate on C corporate profits & dividends.

Data Notes available in Part 1 and Part 2 in the series



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Taxing Businesses: C corporations

Part Two of a series about Taxing Businesses

A C corporation is subject to the corporate income tax. While the income from business structures like S corporations, partnerships, LLC's and sole proprietorships are taxed under the individual income tax and therefore not subject to the corporate tax code.  

However, when owners want to extract income from a C corp, they are subject to a second level of taxation, either though taxes on dividends payments or through a capital gains tax on the sale of their share of the business.


Double Taxation: Scenario I

A C corp first pays taxes on their profits through the corporate tax code then distribute dividends to their owners. These dividends are taxed through the owner's individual income tax. 


Double Taxation: Scenario II

C corporation pays taxes on their profits through the corporate tax code then owners pay tax on capital gains from sale of their stock shares (or the business itself)

 

 


Double Taxation: Scenario I and II

A comparison of the two options available to corporate owners to extract income from the corporation (dividends payments vs through sale of shares). During 1950s, 1960s, 1970s and parts of the 30s, 80s, and 90s, the tax code favored the owners who paid taxes on long-term capital gains. Since 2002, the effective rate for these two options mirrored each other.



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Taxing Businesses: Pass-through businesses

Part one of my series: Taxing Businesses

In my earlier post on the number of returns and net income by business structure, you can see the share of business returns filed by C corporations has dropped 16.6% to 4.9% 1980-2012 with pass-through businesses filing the majority of business returns. However, sole proprietorships, although the majority of pass-through businesses, are less than 10% of net business income.

So, I have created a series of graphs looking at the top tax rates on C corporations vs pass-throughs, focused on the effective top rates for high incomes businesses. Since pass-through businesses don’t pay the corporate income tax, their profits and investments are taxed through the individual tax code as either earned or unearned income.

The different business structures that "pass-through" business income to the individual include: 

  • Partnership's partner
  • S corporation's owner
  • LLC's member
  • Sole Proprietor's individual owner

The effective tax rate on pass-through businesses has drop dramatically since the 1950s. While rate was the same for earned and unearned income except in ‘70s, ‘90s, early ‘00s.


Earned Income

In this scenario of treating the business income as "earned income" that means top individual tax rate combined with the medicare top rate (since the 1990s) when the cap on max income tax by medicare was removed. To help pay for ACA an additional Medicare surcharge was added for high income earners in 2013.


Unearned Income

“Pass-through” business’s profits and investments taxed as unearned income through individual tax code. 

In this scenario of treating the business income as "unearned income" that means taking the top individual tax rate add combine it with the net investment income tax on high income earners. (to help pay for ACA)



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