Philip 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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