Paper: "The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the New Legislation"
SSRN:
Both the House and Senate bills would tax corporate income at a flat rate of 20%. Without effective anti-abuse provisions, this change would encourage taxpayers to use the corporate form as a tax-sheltered savings vehicle.A great read. Some of the ideas for avoiding the second layer of corporate tax are: the step-up in basis for heirs, holding the C-corp investment in a Roth IRA, waiting until retirement, or the qualified small business stock exclusion.
The basic advantage to investing through a corporation is that income is not currently taxed to the investor. The cost of investing through a corporation, however, is the “double tax” on income, both to the corporation (when income is earned) and to the investors (upon a distribution or sale of their corporate interest). If, however, the corporate tax is reduced, taxpayers can use the corporate form to shelter their income from tax.
In combination, the 20% corporate rate and the later second layer of capital gains or dividend tax can produce a rate roughly equivalent to the top ordinary rate. But, deferring or potentially even eliminating the second layer of tax then makes the C-corporation preferable to simply earning the income as an individual subject to the top rate. Corporations can also deduct the state and local income taxes that individuals cannot, which will provide another incentive for individuals to form corporations.
The benefit of a low corporate tax rate is compounded by other structural features of the income tax. Both the House and Senate bills would preserve the “basis step-up” upon a taxpayer’s death. As a result, investment income held through a corporation can first accrue at a low rate during the investor’s life. The investor’s heirs can then inherit the corporate interest with a basis equal to its fair market value, and thereby eliminate the second individual layer of tax. There are also other methods described below for avoiding the second layer of tax.
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