How to Tax Business? Economic Rents, Legibility, and the Corporate-Pass-Through Divide (Fox, Liscow & Love, 2026)

Summary

"How to Tax Business? Economic Rents, Legibility, and the Corporate-Pass-Through Divide," by Edward G. Fox (Michigan Law), Zachary D. Liscow (Yale Law), and Michael Love (Columbia Law), is a 47-page working paper posted to SSRN 18 February 2026 (revised 3 March 2026). It asks a question the wiki's cash-flow tax and allowance for corporate equity pages address from the design side — how to build a business tax base that falls on economic rent rather than the normal return to capital — from a different angle: given that modern business-tax design increasingly achieves that rent-only base through expensing, which organizational form (corporation vs. pass-through partnership) should carry the resulting tax, and why does the answer matter for enforcement, not just efficiency?

The Rent-Base Argument

As business taxation converges toward a cash-flow design via full expensing — a design that, in the authors' words, "exempts from tax both the risk-free return to capital and the risk premium," leaving only economic rent, "income that is beyond what is necessary to induce consumption deferral... or risk taking," as "the quintessentially non-distortionary tax base" — the paper argues pass-through taxation's variable, owner-level rate structure undermines this design. Because pass-through income is taxed at each owner's individual marginal rate rather than a single stable entity rate, the effective tax on the same underlying rent varies by owner, can generate inefficient investment incentives, and in some configurations produces negative effective tax rates. Entity-level (corporate-style) taxation, by contrast, applies one stable rate regardless of who owns the business, better preserving the rent-only base's intended non-distortion.

The Legibility Problem

The paper's second, empirically grounded argument is about enforceability, not just efficiency. Complex multi-tiered partnership structures have made a large and growing share of business activity effectively invisible to tax administration: a single cluster of interconnected partnerships can span 670,000 partnerships, representing 60% of total partnership gains and losses (2020 data); over 30% of large partnerships (defined as having at least $100 million in assets and at least 100 partners) have 20 or more layers of ownership, and the average large partnership has over 530,000 ultimate owners. The enforcement gap this produces is stark: large partnerships are audited at just 0.27%, versus 87% for large corporations — and large-partnership audits face only a three-year statute of limitations, which the authors argue is inadequate given how long it can take to trace ownership through such structures. The paper frames entity-level taxation as a "circuit breaker" against this illegibility: taxing the entity directly sidesteps the need to trace income through an opaque, many-layered ownership chain to each ultimate owner.

The Recommendation Is Scoped, Not Universal

Importantly, the paper's policy recommendation is not a blanket call for entity taxation of all pass-through business income. Per a direct quotation of the paper (via a professional tax-law review of the working paper): "for partnerships above a certain level of complexity, entity taxation would be appropriate." The threshold the authors use illustratively is the same $100 million-assets/100-partners definition of "large" partnership cited above — the argument targets the complex, hard-to-trace end of the pass-through universe specifically, not simple partnerships or sole proprietorships.

Relation to the Georgist Case

This paper extends the wiki's rent-targeting-corporate-tax cluster — allowance for corporate equity, cash-flow tax, and rent-targeting taxes reduce debt bias — with a distinct administrability argument these design-focused pages don't cover: even a theoretically well-targeted rent tax can be undermined not by design flaws but by organizational-form arbitrage and enforcement capacity. The "legibility" framing is broadly Georgist in spirit — a recurring theme across the wiki's rent-capture literature is that the practical difficulty of identifying and reaching rent (whether in land assessment or business-ownership tracing) is often the harder problem than agreeing rent should be taxed at all.

Nuances and Limits

• Scoped recommendation, not a general pass-through-vs-corporate verdict. The paper targets partnerships above a complexity threshold specifically; it should not be cited as a blanket argument for taxing all business income at the entity level.
• Working paper, not yet peer-reviewed. Posted to SSRN February 2026; not confirmed as accepted at a journal as of this session.
• No PDF read directly (B+-claim). This page is built from a professional tax-law reviewer's direct quotations of the paper (TaxProf Blog, February 2026) and the authors' own plain-language policy summary, cross-checked across multiple independent sources for consistency, but the paper's own PDF was not read directly (SSRN paywall/bot-block).

Bears On

• Concept: Allowance for Corporate Equity — a rent-base corporate-tax design this paper's legibility argument complements with an enforcement lens.
• Concept: Cash-Flow Tax — the expensing-based mechanism that, per this paper, leaves only economic rent in the base.
• Benefit: Rent-Targeting Taxes Reduce Debt Bias — the wiki's existing evidence page for rent-focused business taxation, extended here by an administrability argument.

See Also

• Economic Rent
• Allowance for Corporate Equity
• Cash-Flow Tax
• Rent-Targeting Taxes Reduce Debt Bias

Sources

1. Edward G. Fox, Zachary D. Liscow & Michael Love (2026), "How to Tax Business? Economic Rents, Legibility, and the Corporate-Pass-Through Divide," SSRN Working Paper, posted 18 February 2026, revised 3 March 2026. papers.ssrn.com/sol3/papers.cfm?abstract_id=6206239 — fetch blocked (403) to this session 2026-08-28.
2. David Elkins, "SSRN Review & Roundup: Elkins Reviews Fox, Liscow & Love's How to Tax Business?," TaxProf Blog, 20 February 2026 — read in full 2026-08-28 — used for direct quotations of the paper's own text on the rent-base/legibility argument, the 670,000- partnership-cluster and 530,000-average-ultimate-owner statistics, the 0.27%/87% audit-rate gap, the "circuit breaker" phrase, and the scoped "partnerships above a certain level of complexity" recommendation (B+-claim; a professional reviewer's direct quotations of the primary source, cross-checked against the authors' own TaxVox policy summary and SSRN-abstract-level search snippets recurring identically across independent searches, but the underlying PDF itself was not read).