2) The avoidance of C-corps has to do with double taxation and
high-marginal rates on the second level of taxation. So, again,
this analysis is flawed. The absence of C-corps is evidence that
the tax rate/s in fact makes them un-economic and thus illogical
to bring into existence.
Exactly right. A good tax system would provide limited tax advantages (or maybe even added costs) to filing as a pass-thru entity, allowing companies to use the appropriate tax structure, and help make policy appropriately targeted for businesses vs. individuals.
Obama's business tax blueprint explicitly addresses this:
(iii) Distorting the form of businesses.
Business may be organized under a variety of different forms,
including C-corporations, S-corporations, partnerships, and
sole-proprietorships. These organizational forms offer varying
legal, regulatory, and tax treatments. The primary difference in
tax treatment between C-corporations, on the one hand, and
S-corporations, partnerships, and sole-proprietorships, on the
other, is applicability of the corporate income tax. C-corporations
are subject to the corporate tax, while pass-through entities are
not.
The combined effect of this varying tax treatment has contributed
to a lower effective tax rate for pass-through entities relative to
C-corporations. The effective marginal tax rate on new investment
by C-corporations is now 32.3 percent, while the effective marginal
tax rate on new investment by passthrough businesses 26.4
percent.
...
The ability of large pass-through entities to take advantage of
preferential tax treatment has placed businesses organizing as
C-corporations at a disadvantage. By allowing large pass-through
entities preferential treatment, the tax code distorts choices of
organizational form, which can lead to losses in economic efficiency;
business managers should make choices about organizational form
based on criteria other than tax treatment.
...
Reduce the corporate tax rate from 35 percent to 28 percent.
This reduction in the rate would put the United States in line with
other advanced countries, help encourage greater investment in the
United States, and reduce the tax-related economic distortions
discussed above.
As a person who has just spent a bunch of time deciding on my form of business, I consider the S-Corp option to, in fact, be distortive (and costly, from a time and accounting cost perspective). I am glad that this discussion is happening in policy circles, and that Obama explicitly addresses it in his blueprint, even though it is not really part of the public discussion.