The drumbeat to impose the double corporate tax on large pass-through businesses grows louder. This time, it’s Martin Sullivan at Tax Notes arguing that larger firms should all be subject to corporate-level taxes. At least that’s the headline. Read the actual article, however, and our impression is a tax-writer at war with his conclusions. Try these lines:

  • “true tax reform would completely eliminate the double taxation of corporate income.”
  • “After all, the corporate tax is our worst tax.”
  • “What should be the dividing line between businesses subject to corporate tax and those that should be exempt? That’s not an easy question given that there is no economic justification for the corporate tax in the first place. Economics says it should be repealed.”


  • “There is no better corporate tax loophole than complete exemption from corporate tax.”
  • “The causes of fairness and economic efficiency would be served by not allowing large businesses to escape corporate tax and using the revenue gained to relieve the double tax burden for all.”
  • “If some competitors in an industry are exempt from corporate tax and others are not, the tax treatment results in inefficient excess investment for the fortunate and inadequate levels of investment for everyone else. There is also inefficiency across industries. If the apple industry is filled with tax-favored investors and the potato industry is not, there are too many apples and too few potatoes.”
  • “If there must be a second layer of tax on business, economics would push us in the direction of making all business income subject to the tax, with a low rate.”

So Sullivan makes the point that double taxation is inefficient and unnecessary, but at the same time he argues that more businesses should be subjected to double taxes. It is a head-scratching kind of article that left us unsure of where to begin a response.

Beneath all of the contradictions, we believe his basic point is that a fair and efficient system is not realized by having some businesses taxed in a manner that discourages employment and investment, while subchapter S corporations and other pass-through businesses are taxed in a manner more beneficial to those activities.

So far, so good. Since the purpose of tax reform is to make American businesses more competitive, that would argue that we should move away from the inefficient system (the corporate tax) and towards the more efficient system (pass-through treatment, or at least a single layer of tax for all).

But Sullivan doesn’t go there. Instead, he creates a straw man argument for tax reform — to eliminate loopholes — and then argues that pass-through tax treatment is a loophole.

We wholeheartedly reject the idea that a business structure originally enacted by a Democratic Congress and strengthened by subsequent Congresses over the past fifty years is a “loophole.” Moreover, while it can be true that treating similar firms in a dissimilar manner may create economic inefficiencies, it is also true that subjecting more business activity to an additional layer of tax is also inefficient. Sullivan admits as much.

So then, where is the efficiency gain in imposing a new, second layer of tax on a medium-sized business while using the revenue to reduce the double tax on an even larger, multi-national firm? The double tax is increased here and reduced there, by the same amount. By our math, it’s a wash, efficiency-wise.

Further, he appears to have concluded that we are stuck with the double-tax model without providing any supporting arguments. Why are we stuck with the double tax? Why can’t we move away from it rather than towards it? Why is all the work done on integrating (not consolidating, but integrating) our taxation of business income — including the original 2003 Jobs and Growth tax proposal that completely eliminated the second layer of corporate tax and came within a whisker of passing both houses of Congress — so totally void of merit that he never mentions it?

Finally, consider this passage:

Not only are large corporations avoiding corporate tax, they are doing so while smaller competitors in the same industry pay significant tax. Compare the last two columns of the table. The cohort of 339 manufacturing S corporations with an average of $429.3 million in receipts pays no corporate tax. Meanwhile, 801 manufacturing C corporations — much smaller than their S corporation brethren, with an average of $99.3 million in receipts — pay an average of $3.3 million in corporate tax. What policy purpose is served by taxing small manufacturers more than large manufacturers?

Tax Notes‘ readers are steeped in tax policy, but this passage could have left even your S-Corp Team with the impression that S corporations pay no tax. That’s obviously not true. They pay lots of tax on their business income — just not on the corporate tax code and not twice. According to a study commissioned by the Small Business Advocate, S corporations under $10 million in revenues paid the highest effective tax — 27 percent of their income — compared to similar-sized C corporations that paid only 18 percent.

This study did not include the second layer of tax applied to C corporation income, so direct comparisons are not exact. The point is, it’s a long leap from Sullivan’s “no tax” to the reality that S corporation shareholders pay a substantial and competitive amount of tax on their business income.

So if imposing no more than a single layer of tax on business income is more economically efficient and the more desirable goal for tax reform, why move in the opposite direction? The cynic would point out that the current exercise is nothing more than a money-grab. As Sullivan notes:

This tax reform is not about principle. It is about power, so start flexing your muscles.

Unfortunately, we are seeing that for too many actors in this debate, economic efficiency and competitiveness are secondary considerations. If they are improved, great, but that is not the point. What is the point? It’s all about the money.