End Corporate Income Tax? #2

My previous post briefly addressed what would likely happen if the corporate income tax were eliminated. Even lowering the corporate tax rate to the proposed 20% when personal income tax rates are higher can create disparities. The current corporate income tax rate being (mostly) 35% and the top personal income tax rate being 39.6% makes some disparities, but lowering the 35% to 20% makes disparities much larger. Like I said in my prior post, this is likely why proposals to change the taxation of pass-through entities have become a significant part of tax reform.

For example, suppose a C corporation and a pass through entity each earn $10,000 more pre-tax. If the C corp simply retains it, the extra tax is $2,000. If the C corp pays it as compensation, the C corp pays no extra tax and the recipient(s) pay tax on it at whatever rate applies, which could be up to 39.6%. Very likely it will be higher than 20% and in some cases 39.6%. It could be taxed an additional 0.9% (as wages) or 3.8% (as investment income) for Medicare. For 2017 the 39.6% tax bracket starts at $500,000 for each filing status. $500,000 may seem like a lot for personal consumption, but quite often the income is planned for business purposes (link, link). If the C corp opts to pay it as a dividend, the $2,000 tax still applies, since dividends are not deductible, leaving $8,000 as dividends. The recipients pay whatever tax rate applies to dividends, which may be somewhat lower than applies to compensation. 

The tax bills proposed by the House of Representatives and the Senate Finance Committee are yet more complicated because they (a) limit interest deductions in computing income and (b) split income between capital and wage-related and apply a lower tax to the former or exempt a portion of total income (link).