Taxing Businesses: Net Savings

Taxing Businesses: Net Savings

Part 6 of a series about Taxing Businesses

In the 1980s the effective top rate on pass-throughs (unearned) was dropped to match the corporate rate on profits, making pass-through businesses more desirable than in the past since with pass-throughs owners were not double taxed. As a consequence, these tax changes created an incentive to change the business structure from C corporation to pass-throughs. The double taxation of corporate profits had provided an incentive for corporations to retain earrings (to save) but a pass-through’s profit is tax indifferent between saving and consumption (there is no incentive to either save it or spend it).

C corporation’s share of net business income dropped from 1980 to 2012, 68% to 37%. The effect of fewer C corporations and more pass-through businesses was less savings since retained earnings by corporations was half of private savings (pdf). So, tax-induced decrease in number of corporations had a

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substantial effect on the level of private savings in the US.

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Data Notes: Tax rates are from Internal Revenue Service; Tax Policy Center; Center for Tax Justice; Tax Foundation and  more details on the tax rates available in Part 1 and Part 2 in the series.

Federal Reserve Economic Data is the source for net savings.

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