Monday, March 5, 2012
Partnerships play an increasingly vital role in the federal income tax. Yet partnership taxation is deeply flawed, with enormously complicated provisions that strain the voluntary compliance mechanism on which the federal income tax relies. This article takes some early steps toward reform, proposing a holistic approach to partnership taxation. The story of partnership taxation is a story of four values – flexibility, efficiency, equity, and simplicity. Their discord has compromised the functionality of partnership taxation, thwarting the achievement of any of its underlying values, eroding public legitimacy, and impairing its ability to achieve systemic ends at great public cost.
The history of partnership taxation suggests a solution: improving the system’s functionality through the unification and harmonization of its values. To that end, this article looks to Ronald Dworkin’s principle of integrity to develop a coherent vision of partnership taxation. It uses the principle of integrity as a compass for the reorientation and recalibration of partnership values, creating a more principled system of partnership taxation where unified and harmonious values work together in service of systemic ends.
This article offers a novel formulation of the problem of partnership taxation, which, in turn, may lead to a novel way of thinking about the solution. The goal is to take partnership taxation apart and put its pieces back together, setting the system on a path to greater functionality. This article does not offer specific statutory or regulatory reforms, but instead seeks a broader vantage point, outlining an intellectual framework by which future reforms can be formulated or evaluated.