You made a good point about all the other expenses a business can dodge if they use only 1099 contractors. The ability of a contractor to subtract expenses and pay tax only on net income is a sweet deal. Going to work is an expensive proposition. It would be nice to be able to subtract all of those expenses from pre-tax income.
The legal way to do that is to form a Chapter C corporation and pass all incoming revenue through the corporation. Pay all of the expenses from the corporation including payroll. Your "customers" are doing business with the corporate entity instead of the individual employees. All of the protections of the corporation accrue to that arrangement...at the expense of forming and administering the corporation properly.
Most states and towns use a property tax to raise revenues. This tax actually predates the income tax. Each year the value of the property you own would decrease unless you replace it.
A corporation is not needed in order to deduct ordinary and necessary business expenses from revenues.