By some estimates, more than 60% of U.S. businesses with profits of $1 million are structured as pass-throughs, the highest rate among developed countries. Their popularity is one big reason why federal corporate tax collections amounted to just 1.3% of GDP in 2010, well below their mark of 2.7% in 2006 and far beneath their peak of 6.1% in 1952.

Almost everyone in Washington appears to agree that the Byzantine corporate tax code needs a revamp. But on this point, the business community is split, presenting perhaps the biggest obstacle to any overhaul.

Many Democrats as well as some Republicans are willing to consider taxing the largest pass-throughs. It is a matter of fairness, they argue, and would also raise new revenue to help offset the cost of cutting tax rates.

On the other side, a Republican-backed coalition including building contractors, beer distributors, auto dealers and funeral directors argues that changing the rules will inhibit entrepreneurship, as well as hit their pocketbooks.

Eoin Treacy's view Proposals to tax pass-through corporations have been circulating for some time without gaining a great deal of traction in Washington. The more companies that adopt these favourable tax strategies, the more attention they are likely to attract from a revenue hungry federal government. In an election year where the incumbent looks set to run on a fairness platform and the challenger likely to take a business friendly tack, the pass-through sector could attract further attention. (Also see Comment of the Day on June 8th 2011).

Exchange traded MLPs generally tend to pay impressive dividends, which are particularly inviting in the current low yield environment. They have outperformed over the last few years because they offer exposure to the mining and energy sectors' strong cash flows and because of their favourable tax treatment.

Canada changed how it treated its income trusts for tax purposes in 2006 and the sector fell by 20%. The credit crisis had a much more deleterious effect. It has since regained the pre-crisis peak. If the USA were to change how it treats its MLPs and S Corps their value would fall at least initially. They would subsequently need to be valued on their individual merits.

This report from Oppenheimer focusing on the MLP sector, kindly contributed by a subscriber, may also be of interest.