The Impact of the 2017 Act's Tax Rate Changes on Choice of Entity

Abstract

The double tax imposed on the earnings of C corporations results in significant economic inefficiencies because of its effect on the choice of entity for conducting a business. All other items being equal, the double tax distorts taxpayers’ choice of entity because it motivates taxpayers to favor flow-through entities when they otherwise would not. The reduction in the corporate and individual tax rates in the legislation popularly known as the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) has been in part justified on the grounds that the rate changes would help achieve parity between effective tax rates imposed on C corporations and on flow-through entities.