Washington, D.C. — A new Center for American Progress analysis finds that the American business landscape has fundamentally changed over the past four decades, with partnerships and other pass-through businesses overtaking traditional corporations as the largest source of business income. Business income earned by pass-through businesses increased from 44 percent in 1988 to an average of 68 percent from 2013 to 2022, reflecting a broad shift away from traditional corporations. These dynamics have transformed how business profits are taxed, reduced federal revenue, and increasingly concentrated tax benefits among the wealthiest Americans.
While much of the public debate around business taxation focuses on corporations, most business income is now earned through pass-through entities that often face lower effective tax rates and less IRS oversight. The analysis argues that tax policy must evolve to reflect today’s economy by addressing tax avoidance through large partnerships and other complex pass-through businesses.
“Our tax code is still built around the assumption that corporations dominate American business, but that’s no longer true,” said Corey Husak, director of tax policy at the Center for American Progress and co-author of the analysis. “Today, many of the country’s largest and most profitable businesses operate as partnerships while benefiting from lower tax rates and weaker oversight. If policymakers are serious about building a fairer tax system, they have to look beyond corporations and ensure that wealthy pass-through businesses are paying what they owe.”
Key findings from the analysis include:
- Partnerships now generate a larger share of U.S. business income than traditional corporations. From 2013 to 2022, partnerships accounted for 36 percent of business income, compared with 32 percent for C corporations.
- Pass-through businesses pay no federal business level tax, and their owners typically pay less tax than shareholders of C corporations. Because they are exempt from tax at the entity level, profits earned through pass-through businesses face lower overall tax rates than profits earned by corporations.
- Recent tax policy has widened the gap. The 2017 Tax Cuts and Jobs Act created Section 199A deduction, and the One Big Beautiful Bill Act made it permanent—lowering the top tax rate on qualifying pass-through income from 37 percent to 29.6 percent, with nearly 90 percent of the benefits flowing to households earning more than $200,000 annually and roughly half going to millionaires.
- Pass-through income is even more concentrated among wealthy Americans than corporate income. In 2022, the top 1 percent received roughly one-quarter of their total income from pass-through businesses, and one study found that 69 percent of partnership income accrued to the top 1 percent. In comparison, the top 1 percent receive 45 percent of corporate income.
- Large partnerships pose growing enforcement challenges. Complex ownership structures make it harder for the IRS to trace income and conduct effective audits, allowing sophisticated businesses to better avoid taxes legally owed. Husak has recently argued that the United States needs a “shell company tax” to ensure these businesses are properly paying taxes.
The analysis recommends modernizing business tax policy by looking beyond the corporate tax code and addressing the rapid growth of large pass-through businesses. Potential reforms include taxing shell companies in complex business partnerships, eliminating the Section 199A deduction, improving IRS enforcement of large partnerships, and requiring some partnerships to be taxed as corporations.
Read the full analysis: “Business Income Has Moved Beyond Corporations, and Tax Policy Must Follow” by Corey Husak and Mimla Wardak
For more information on this topic or to speak with an expert, please contact Christian Unkenholz at [email protected].