Michael Love (Columbia; Google Scholar) presents Who Benefits From Partnership Flexibility? at Georgetown today as part of its Tax Law and Public Finance Workshop hosted by Brian Galle and Day Manoli:
Partnerships (including LLCs) account for more than one-third of US business profits. A key feature they offer owners and investors is unparalleled flexibility to divide up income and losses, but this creates opportunities to lower taxes—a well-recognized concern since the 1950s. Yet little is known about what happens in practice. Using anonymized tax records, I estimate over $300 billion of tax benefits associated with this flexibility between 2011-2020. But these benefits are narrowly concentrated in only 9% of firms, generally larger and more complex firms, while the vast majority of firms—especially smaller operating firms—do not utilize this flexibility at all.
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