Don,
I've given this further consideration this am. One reason a group might elect C Corp status over subchapter S is the presence of non american citizen holders of the capital stock. This suggests that some portion of C corp income accrues to foreign nationals. If this is the case, then elimination of corporate taxes would shift some tax burden from non US investors to US citizens.
Let's suppose that corporate taxes go to zero Jan 1, 2002. How will this impact other common structures, say the sole proprietorship or partnership?
If the corner grocery store operator does business under either of these structures, they will be subject to Federal, State and FICA taxes on income. However, if they incorporate, they will be subject to no income or fica tax at all, unless they choose to distribute income. Income distributed will be passive rather than ordinary, so incorporating with a zero tax corporate rate will allow them to avoid the 15%+ FICA tax.
Thus, such a change should result in a massive move to incorporate. It should greatly enhance the ability to build capital by leaving it within the corporate shell. This would be regressive, as higher networth individuals can allow the capital to compound to a greater extent than small operators who must draw out capital for living expenses.
Any thoughts on these possible outcomes? |
