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Wednesday, September 26, 2012

Postlewaite: Raising Revenue Through Misguided Classification Reform

Tax AnalystsPhilip F. Postlewaite (Northwestern), Raising Revenue Through Misguided Classification Reform, 136 Tax Notes 1177 (Sept. 3, 2012):

Spending cuts and tax increases are omnipresent topics in the national conversation. As the search for tax revenue intensifies, various proposals for modifying the code have surfaced. The Obama administration and others recently have suggested that large passthrough entities be taxed as C corporations. That proposal reflects a misplaced emphasis on revenue generation rather than sound tax policy principles. If adopted, it would undercut the steady movement by Congress, Treasury, and the IRS over the past 30 years toward business tax neutrality through a single tax regime for all business forms. Also, the proposal would result in planning efforts to avoid its application by maintaining business receipts below the threshold for classification as a large enterprise. Further, it is uncertain whether it would generate significant revenue, given that the trigger for the second level of tax — the distribution of earnings to the owners of the enterprise — often is discretionary. When combined with the necessary grandfathering rules, the revenue effect may not be material. The proposal should therefore be rejected because it does not promote the tax policy goals of economic efficiency, simplicity, equity, and business tax neutrality.

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