Creating Effective Tax Reform Will Be Difficult

Creating effective tax reform in Washington will likely be difficult, as both the tax code – and the tax base – are complex.

While many advocate creating effective tax reform, a wide range of businesses have sharply reduced their tax liabilities either by not repatriating their active income earned overseas or by harnessing tax breaks, The Fiscal Times reported.

In addition, many companies have changed their corporate structure to become pass through entities – including partnerships, sole proprietorships and S-corporations – in order to lower their tax rates, according to the news source. After making such a shift, organizations must pay individual income tax rates on their earnings, which are lower than those that corporations pay on their profits.

Tax base shifts

As a rising number of organizations have taken advantage of this opportunity, the tax base has shifted. A Joint Committee on Taxation review produced earlier this year detailed these changes, stating that in fiscal year 2014, corporate income tax receipts were 1.9 percent of gross domestic product. While this figure was slightly higher than the last two years, it fell short of the average fraction since 1950, which is 2.6 percent, according to Reuters.

The JCT report also revealed that businesses filed 1.64 U.S. corporate tax returns in 2012, compared to 2.18 million in 2000, the media outlet reported.

Individual returns rise

While the number of corporate tax returns has declined over roughly the last 15 years, the IRS has been receiving more returns from sole proprietorships, and these organizations filed 23.5 million such returns in 2012, compared to 17.9 million in 2000, according to the news source. In addition, the returns filed by S-corporations and partnerships increased.

The change in tax revenue provided by these organizations has also been significant, The Fiscal Times reported. Pass through entities generated $1.4 trillion in revenue by 2010, a sharp increase from the figure of $100 billion a year in the 1980s. Urban Institute economist Joe Rosenberg analyzed IRS data, and discovered that business income provided $850 billion worth of adjusted gross income on individual returns.

“It’s really kind of changed the landscape, and it’s made the whole issue of what is the composition of individual taxes very different,” Howard Gleckman, who works for the Urban Institute as a Resident Fellow and is an expert on tax policy, told the news source.

During a recent interview, he emphasized that it is often challenging to differentiate business taxation from the individual tax code, the media outlet reported. Gleckman – and other experts – have stated that because so many businesses have changed their structures, any attempt in creating effective tax reform proposals must account for the shifting landscape.