There is much debate among economists and policymakers about the optimal corporate tax rate to balance revenue generation and U.S. competitiveness. In general, proponents of increasing the corporate income tax rate argue that doing so would help ensure corporations pay their fair share, bring such revenues back in line with historical norms, raise new revenues to pay for national priorities and improve our fiscal outlook, and help address inequality. Advocates who push for a lower corporate rate argue that raising the cost of capital stifles investment in the economy, reduces productivity, and inhibits the private sector as an engine of economic growth.

Corporate tax expenditures implicitly subsidize some economic activities and sectors of the economy at the expense of others, and thereby distort economic decision-making.

Similar to the individual tax code, many have suggested that an ideal system would do away with some or all corporate tax breaks, thereby avoiding distortions generated by special provisions and instead promoting economic growth.

Not all businesses are taxed as corporations. Pass-through businesses, such as sole proprietorships, partnerships, S corporations, and limited liability companies, allocate profits to their owners who then pay taxes on those profits through the individual income tax code. In recent years, pass-through entities have grown to represent an increasingly large percentage of all businesses, and therefore business income, in the United States. Furthermore, some pass-through income is eligible for a 20 percent deduction through 2025.

There are a number of possible reforms to change the treatment of business income, add clarity to the code, cut down on tax avoidance and help ensure a fair tax system that would improve our nation’s fiscal outlook.