The Future Taxation of Private Business Firms

Recent federal and state law developments liberalizing the permissible forms of business organizations and the classification of such organizations for tax purposes have underscored the need to reexamine the current system of taxing the income of private businesses. This article, which undertakes that reexamination, makes two principal claims. First, current law ought to be replaced by a system whereby all private business firms, no matter what their form of organization and organizational characteristics, are taxed as conduits for income tax purposes. Second, because conduit taxation is so complicated, the system should be implemented through a "two-track" approach in which a subset of private business firms would, at their election, be subject to a simplified set of tax rules.

In general, the simplified version would be available to firms which have only individuals as owners and which have surrendered some flexibility in their economic dealings. Part II of this article briefly explains why current law merits reexamination and Parts III and IV correspond to the two main claims being made. A final part contains a brief summary and conclusion.