Valuing Pass-Through Entities

Chapter 3Effective Federal Individual and Corporation Income Tax Rates

The preceding chapter analyzed statutory federal income tax rates in the maximum individual and corporation income brackets. Due to the progressivity of tax rates, the top 1 percent of taxpayers by income share reported approximately 17 percent of all adjusted gross income and paid approximately 37 percent of all income taxes in 2009. Thus, 63 percent of 2009 income taxes were paid by individuals not in the top 1 percent income bracket.¹ Accordingly, only a very small percentage of taxpayers are impacted by maximum income bracket tax rates. In this chapter we analyze the impact of tax rates on lower levels of income during the period 1913–2013.

How were lower-, middle-, and upper-income individuals affected by the rollercoaster ups and downs of income tax rates and changes in the IRC during the years 1913–2013? Do lower levels of income change the incentives for operating a business as a C corporation or a PTE? If so, when, why, and how were business values impacted by operating as a C corporation versus a PTE? What are the implications for business appraisers performing valuations in a changing tax environment?

To address these issues, this chapter provides the following discussion:

1. It analyzes three different hypothetical levels of annual, taxable income in 2012 Consumer Price Index (CPI) equivalent amounts of $10,000, $100,000, and $1,000,000. To simplify the analyses, state income taxes, itemized deductions, ...