A Brief Overview of Business Types and Their Tax Treatment

Mark P. Keightley
Specialist in Economics

In the United States, how a business is taxed at the federal level is partly dependent on how it is organized. The income of subchapter C corporations, also known as “regular” corporations, is taxed once at the corporate level according to the corporate tax system, and then a second time at the individual-shareholder level according to the individual tax rates when corporate dividend payments are made or capital gains are recognized. This leads to the so-called “double taxation” of corporate income. Businesses that choose any other form of organization are, in general, not subject to the corporate income tax. Instead, the income of these businesses passes through to their owners and is taxed according to individual income tax rates. Examples of these alternative “pass-through” forms of organization include sole proprietorships, partnerships, subchapter S corporations, and limited liability companies.

This report summarizes the general tax treatment of corporate and pass-through businesses. The intent is to introduce those who are unfamiliar with the current U.S. business tax environment to the basics of corporate and pass-through taxation. Understanding how various businesses are taxed provides a starting point from which one can evaluate current and future proposals to change the taxation of corporations and pass-throughs. Additionally, since pass-through income is typically taxed only at individual income tax rates, this report is also a useful starting point for understanding the effects on pass-through businesses from a change to individual income tax rates. A list of related CRS products on business taxation may be found at the end of the report.


Date of Report: June 12, 2013
Number of Pages: 12
Order Number: R43104
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Insurance Agent Licensing: Overview and Background on Federal “NARAB” Legislation

Baird Webel
Specialist in Financial Economics

The individual states have been the primary regulators of insurance in this country for the past 150 years. Congress specifically authorized the states’ role in the 1945 McCarran-Ferguson Act (15 U.S.C. §§1011-1015), and state primacy in insurance regulation has been recognized in more recent laws shaping the financial regulatory system, such as the 1999 Gramm-Leach-Bliley Act (GLBA; P.L. 106-102) and the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203). The system of multiple state regulators, however, has faced criticism over the years, with frequent focus on the efficiency of the system. One particular aspect of regulation that has been criticized by some as overly burdensome and inefficient is the licensure of insurance agents and brokers, known collectively as insurance “producers.” Every state requires specific licenses, sometimes with differing criteria, and insurance producers have identified the need to have multiple licenses as a significant expense for their operations.

Organizations such as the National Association of Insurance Commissioners (NAIC) and the National Conference of Insurance Legislators (NCOIL) create model laws and undertake other steps to harmonize insurance regulation and laws across the country, including the promulgation by the NAIC of models for insurance producer licensing. The individual states, however, are sovereign entities, and any models suggested by the NAIC or NCOIL must first be enacted by state legislatures. The state authorities may amend models or may completely reject suggestions from outside groups. Often this is done with the argument that laws and regulations need to be adapted to particular local circumstances or risks, such as hurricane risks along coastal areas.

Federal proposals addressing multiple state insurance producer licensing requirements through the creation of a National Association of Registered Agents and Brokers (NARAB) appeared as far back as the 102nd Congress, and a version of NARAB was included in the Gramm-Leach- Bliley Act. These GLBA provisions, known generally as “NARAB I,” were conditional, and would not come into effect if a majority of states passed laws providing for uniformity or reciprocity in insurance producer licensing. Although a sufficient number of states met the GLBA requirements and thereby prevented the creation of NARAB, insurance producers continued to identify issues in the state licensing system. As a consequence, “NARAB II” legislation, mandating the creation of a NARAB organization, was introduced in every Congress since the 110th. It was passed by the House in the 110th Congress and the 111th Congress, but was not considered by the Senate.

In the 113th Congress, the National Association of Registered Agents and Brokers Act of 2013 was introduced in both the Senate (S. 534) and the House (H.R. 1155/H.R. 1064). Under this legislation, membership in the NARAB organization to be created would permit insurance producers to operate in multiple states without obtaining specific licenses from these states. To become a NARAB member, an insurance producer would be required to have a license from at least one state, pass a criminal background check, and meet other requirements to be set by the association. The legislation would require that these additional requirements be not “less protective to the public” than the NAIC model law on insurance producer licensing. The association would be governed by a 13-member board made up of 8 current or former state insurance commissioners and 5 members from the insurance industry. The President would appoint the board, with advice and consent of the Senate, and retain the ability to remove the board and override the NARAB organization’s rules or actions. S. 534 was amended and ordered favorably reported by the Senate Committee on Banking, Housing, and Urban Affairs on June 6, 2013.


Date of Report: June 12, 2013
Number of Pages: 9
Order Number: R43095
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The Chained Consumer Price Index: What Is It and Would It Be Appropriate for Cost-of-Living Adjustments?

Julie M. Whittaker
Specialist in Income Security

The U.S. Bureau of Labor Statistics (BLS) publishes two important measures of inflation: the Consumer Price Index for all Urban Consumers (CPI-U) and the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). (Hereinafter in this report, the CPI-W and CPI-U will be referred to collectively as the standard CPI.) The standard CPI might seem like just another economic indicator, but it is a powerful policy lever. Because the CPI-W is used to calculate annual cost-of-living adjustments (COLAs) to Social Security retirement benefits and the CPI-U is used to calculate annual inflation adjustments to personal income tax brackets, for example, changing the basis of the adjustments could substantially affect outlays and revenues.

Since August 2002, BLS has published a supplemental measure known as the Chained Consumer Price Index for all Urban Consumers (C-CPI-U). The aim of the C-CPI-U is to produce a measure of change in consumer prices that is free of substitution bias. One of the difficulties in estimating cost-of-living changes is that consumers often alter their buying patterns in response to changing relative prices. In other words, consumers tend to buy more of the goods and services whose prices are rising slower than average and fewer of the goods and services whose prices are rising faster than average. Substitution is believed to insulate consumers from the full effect of rising prices on maintaining their standard of living. Because the CPI-W and CPI-U do not entirely account for substitution, they overstate the impact of inflation on consumer well-being.

As a result of better reflecting consumer substitution, the C-CPI-U has typically increased to a lesser extent than either the CPI-U or CPI-W. This relationship has prompted calls for switching to the C-CPI-U when calculating automatic adjustments to inflation-indexed federal programs and individual tax provisions to slow growth in the budget deficit. The 2010 “Simpson-Bowles” report recommended government-wide replacement of the CPI-W and CPI-U with the chained CPI, for example. In April 2013, a modified version of the Chained CPI-U proposal was included in President Obama’s Fiscal Year 2014 Budget.

The CPI-W and CPI-U are final upon being issued, making them attractive for use in calculating cost-of-living adjustments. In comparison, the C-CPI-U is subject to two revisions after its first release. If the two indexes were replaced by the C-CPI-U, cost-of-living adjustments would either have to wait until the final number was available or rely on preliminary estimates that could change up to two years after the fact.

This report provides technical and logistical information on how the C-CPI-U is constructed and reported by the BLS. For information on programs indexed to the CPI, see CRS Report R42000, Inflation-Indexing Elements in Federal Entitlement Programs, coordinated by Dawn Nuschler. For information on how Social Security benefits could be affected by using the Chained CPI-U to compute annual COLAs, see CRS Report R42086, Using a Different Cost-of-Living Measure for Social Security Beneficiaries: Some Policy Considerations, by Christine Scott.


Date of Report: June 12, 2013
Number of Pages: 15
Order Number: RL32293
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The Workforce Investment Act and the One-Stop Delivery System

David H. Bradley 
Specialist in Labor Economics

The Workforce Investment Act of 1998 (WIA; P.L. 105-220), which succeeded the Job Training Partnership Act (P.L. 97-300) as the main federal workforce development legislation, was enacted to bring about increased coordination among federal workforce development and related programs. WIA authorized the appropriation of “such sums as may be necessary” for each of FY1999 through FY2003 to carry out the programs and activities authorized in the legislation. Authorization of appropriations under WIA expired in FY2003 but has been extended annually through the Departments of Labor, Health and Human Services, and Education and Related Agencies Appropriations Act (Labor-HHS-ED). Reauthorization legislation was considered in the 108th, 109th, and 112th Congresses. In the 113th Congress, the House passed legislation reauthorizing WIA.

Workforce development programs provide a combination of education and training services to prepare individuals for work and to help them improve their prospects in the labor market and may include activities such as job search assistance, career counseling, occupational skill training, classroom training, or on-the-job training. The federal government provides workforce development activities through WIA’s programs and other programs designed to increase the employment and earnings of workers.

The WIA system provides central points of service by its system of around 3,000 One-Stop centers nationwide through which state and local WIA training and employment activities are provided and through which certain partner programs must be coordinated. This system is supposed to provide employment and training services that are responsive to the demands of local area employers. Administration of the One-Stop system occurs through Workforce Investment Boards (WIBs), a majority of whose members must be representatives of business and which are authorized to determine the mix of service provision, eligible providers, and types of training programs, among other decisions. Unlike its predecessor, the Job Training Partnership Act (JTPA), WIA provides universal access to its services. Finally, WIA is oriented toward a work first approach to workforce development, such that placement in employment is the first goal of the services provided under Title I of WIA

WIA includes five titles: Workforce Investment Systems (Title I), Adult Education and Literacy (Title II), Workforce Investment-Related Activities (Title III), Rehabilitation Act Amendments of 1998 (Title IV), and General Provisions (Title V). Title I, whose programs are primarily administered through the Employment and Training Administration (DOLETA) of the U.S. Department of Labor (DOL), includes three state formula grant programs, multiple national programs, Job Corps, and demonstration programs. Title II, whose programs are administered by the U.S. Department of Education (ED), includes a state formula grant program and National Leadership activities. Title III of WIA amends the Wagner-Peyser Act of 1933, and Title IV amends the Rehabilitation Act of 1973. Title V includes provisions for the administration of WIA.

This report provides details of WIA Title I state formula program structure, services, allocation formulas, and performance accountability. In addition, it provides a program overview for national grant programs. It also provides brief overviews of Titles II and IV. Title III of WIA amends the Wagner-Peyser Act of 1933, which establishes the Employment Service (ES), to make the ES an integral part of the One-Stop system created by WIA. Because the ES is a central part of the One-Stop system, it is discussed briefly in this report even though it is authorized by separate legislation (Wagner-Peyser Act of 1933).


Date of Report: June 14, 2013
Number of Pages: 51
Order Number: R41135
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Social Security Reform: Legal Analysis of Social Security Benefit Entitlement Issues

Kathleen S. Swendiman
Legislative Attorney

Thomas J. Nicola
Legislative Attorney

Calculations indicating that in the long run the Social Security program will not be financially sustainable under the present statutory scheme have fueled the current debate regarding Social Security reform. This report addresses selected legal issues which may be raised regarding entitlement to Social Security benefits as Congress considers possible changes to the Social Security program, and in view of projected long-range shortfalls in the Social Security Trust Funds.

Social Security is a statutory entitlement program. Beneficiaries have a legal entitlement to receive Social Security benefits as set forth under the Social Security Act. The fact that Social Security benefits are financed by taxes on an employee’s wages, however, does not limit Congress’s power to fix the levels of benefits under the Social Security Act or the conditions upon which they may be paid. Congress’s authority to modify provisions of the Social Security program was affirmed in the 1960 Supreme Court decision in Flemming v. Nestor, wherein the Court held that an individual does not have an accrued “property right” in his or her Social Security benefits. The Court has made clear in subsequent court decisions that the payment of Social Security taxes conveys no contractual rights to Social Security benefits.

Congress has the power to legislatively promise to pay individuals a certain level of Social Security benefits, and to provide legal evidence of Congress’s “guarantee” of the obligation of the federal government to provide for the payment of such benefits in the future. While Congress may decide to take whatever measures necessary to fulfill such an obligation, courts would be unlikely to find that Congress’s unilateral promise constitutes a contract which could not be modified in the future. In addition, a congressional promise not to reduce a specific level of Social Security benefits payable to certain eligible individuals would likely not overcome the constitutional principle, subject to due process considerations, that one Congress may not bind a subsequent Congress to legislative action or inaction.

The calculations concerning the possible future insolvency of the Social Security Trust Funds raise a question whether that result would affect the legal right of beneficiaries to receive full Social Security benefits. While an entitlement by definition legally obligates the United States to make payments to any person who meets the eligibility requirements established in the statute that creates the entitlement, a provision of the Antideficiency Act prevents an agency from paying more in benefits than the amount in the source of funds available to pay the benefits. The Social Security Act states that Social Security benefits shall be paid only from the Social Security Trust Funds, and the act appropriates all payroll taxes to pay benefits. Although the legal right of beneficiaries to receive full benefits would not be extinguished by an insufficient amount of funds in the Social Security Trust Funds, it appears that beneficiaries would have to wait until the Trust Funds receive an amount sufficient to pay full benefits in the case of a shortfall, unless Congress amends applicable laws.


Date of Report: June 7, 2013
Number of Pages: 15
Order Number: RL32822
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