	Introduction

Some tax proposals have focused on broadening the tax base and lowering the rates of both individual and corporate income taxes. In some cases, these proposals have advanced a revenue-neutral tax reform. In other instances, they have proposed revenue increases. An example of a broad-based revenue-neutral income tax reform is H.R. 1 introduced in the 113 th Congress by then Ways and Means Chairma n Dave Camp. The bill proposed lowering both individual and corporate rates, while increasing the tax base through revising both business-related tax benefits (such as accelerated depreciation) and individual benefits (such as itemized deductions). Given the challenges of adopting a broad income tax reform, some proposals have focused on business-only tax reform. The Obama Administration has proposed such a reform, which would be revenue neutral and include cutting the corporate rate, reducing business-related tax expenditures, reducing taxes on manufacturing, simplifying taxes for small business, and reforming the international tax system. A challenge to confining tax reform to businesses is that many provisions that expand the tax base may affect pass-through businesses. Unlike income in regular corporations, which is subject to the corporate income tax rate, income in pass-through businesses passes through to the individual owners and is taxed at the individual income tax rate. The effects on pass-throughs of broadening the tax base most likely could not be offset by generally lowering individual tax rates because the vast majority of those individual rates apply to labor or passive income. The cost of lowering the individual rates on this labor or passive income would probably be prohibitive. As a result, a revenue-neutral tax reform composed solely of corporate rate reductions and base-broadening provisions would likely increase the tax burden on pass-through businesses in the absence of other revisions. The next section examines corporate tax expenditures and the extent to which those tax expenditures affect pass-through firms. S corporations elect to be taxed as proprietorships or partnerships. Shares of Total Business Income

Noncorporate business income is large relative to that of the corporate sector, but small relative to total individual income. The business and rental incomes, therefore, constituted 9.2% of income reported on individual income taxes. These relative sizes confirm the basic challenge to a corporate-only or business-only tax reform: provisions that broaden the base for business in general could have consequences for unincorporated businesses that constitute a large share of total business income earned by both sectors, but are such a small part of the individual income tax that cutting overall individual tax rates to offset noncorporate base-broadening provisions would create revenue losses for the large share of income that is not business income. Broadening the tax base could be achieved by eliminating various tax expenditures, such as exemptions, credits, or deductions. Provisions That are Primarily or Solely Corporate

Some provisions are almost entirely corporate. If this provision is not a potential source of revenue for corporate rate reduction, as may be the case (see the " Limit Reform to International Tax Changes " section), the tax expenditures that might be considered for base broadening that do not also spill significantly over into the noncorporate sector are limited. A simpler approach would be to reduce effective statutory rates for unincorporated businesses by allowing a deduction from taxable income for pass-through businesses following the model of the production activities deduction. This deferral of tax on foreign source income is the single largest corporate tax expenditure.
Some tax proposals have focused on broadening the tax base and lowering the rates of both individual and corporate income taxes. In some cases, these proposals have advanced a revenue-neutral tax reform. In other instances, they have proposed revenue increases. An example of a broad-based revenue-neutral income tax reform is H.R. 1 introduced in the 113th Congress by then Ways and Means Chairman Dave Camp. The bill proposed lowering both individual and corporate rates, while increasing the tax base through revising both business-related tax benefits (such as accelerated depreciation) and individual benefits (such as itemized deductions).
Given the challenges of adopting a broad income tax reform, some proposals have focused on business-only tax reform. The Obama Administration has proposed such a reform, which would be revenue neutral and include cutting the corporate rate, reducing business-related tax expenditures, reducing taxes on manufacturing, simplifying taxes for small business, and reforming the international tax system.
A challenge to confining tax reform to businesses is that provisions that expand the tax base may affect pass-through businesses, such as partnerships, proprietorships, and small business (Subchapter S) corporations. Unlike income in regular corporations, which is subject to the corporate income tax rate, income in pass-through businesses passes through to the individual owners and is taxed at the individual income tax rate. The effects on pass-throughs of broadening the tax base most likely could not be offset by generally lowering individual tax rates because the vast majority of those individual rates apply to labor or passive income. The cost of lowering the individual rates on this labor or passive income would probably be prohibitive. As a result, a revenue-neutral tax reform composed solely of corporate rate reductions and base-broadening provisions would likely increase the tax burden on pass-through businesses in the absence of other revisions.
Noncorporate business income is large relative to that of the corporate sector, but small relative to total individual income. Noncorporate business and rental income is estimated to be 45% of total business income but only 9.2% of income reported on individual income taxes. Unincorporated businesses are estimated to own around 40% of the business capital stock.
Broadening the tax base could be achieved by eliminating various tax expenditures, such as exemptions, credits, or deductions. Of the major corporate tax expenditures and other provisions that might be considered for base-broadening, the largest is the deferral of tax on foreign source income, which accounts for about 40% of corporate tax expenditures and is almost entirely corporate. This provision, however, may not be available for corporate rate reduction, based on international tax reform proposals that have been advanced. Of the other tax expenditures, some have limited overlap with unincorporated businesses whereas others significantly affect pass-through businesses. The next two largest tax corporate tax expenditures, accelerated depreciation for equipment and the production activities deduction, also benefit pass-through businesses.
Increasing the tax burden on pass-through businesses to finance corporate rate reductions could lead to efficiency gains because corporate income currently is taxed more heavily than noncorporate income. Moreover, any tax reform will produce winners and losers (for example, creditors will also experience higher effective tax rates and industries will be affected differentially). Other options for business only tax reform are to target base-broadening provisions that are primarily corporate, limit changes in provisions to corporations, introduce or expand provisions that benefit small business, allow a deduction or alternative rate structure for pass-through income, or limit corporate reform to international tax changes.