• Today, most business income is taxed through the individual income tax code, rather than the corporate code. This concerns a distinction only a CPA could love. One type of corporation, a "C-corporation," pays corporate income taxes on its profits. Another type, the "S-corporation," pays taxes on its profits through the individual income-tax returns of the owner.
"Changes in tax rates and rules for C- and S-corps contributed to more firms becoming S-corps and thus paying individual rather than corporate income tax," said Kyle Pomerleau, an economist with the Tax Foundation. That has boosted individual income-tax collections and reduced corporate income-tax collections.
Between 1980 to 2010, the category of businesses that includes S-corporations, sole proprietorships, partnerships and LLCs has increased by 10.9 million to over 30 million, while the number of corporations has declined, Pomerlau said.
This means there are fewer corporations to pay the corporate income tax. In addition, the amount of business income generated by these types of businesses has risen as well, Pomerlau said. Between 1980 and 2010, this type of income has increased fivefold, from $320 billion to more than $1.6 trillion, he said.
"In fact, most recent data shows that (these) businesses are earning more total net income than traditional C-corporations," Pomerlau said. "In 1980, it was the complete opposite."