New Academic Analysis Finds Double Taxation on Partnership Businesses Reverses Trend Toward Tax Neutrality
Postlewaite: “The logic for the [tax increase] proposal is undercut by the evolution of the tax law over the last 30 years, which has embraced single-level taxation as the standard for business tax neutrality … a double tax paradigm is a thing of the past.”
A recent article published in Tax Notes by tax expert and Professor of Law at Northwestern University, Professor Philip F. Postlewaite charges that proposals by the Obama Administration and others to tax large passthrough entities as C-corporations undermines the goal of raising revenue to offset erosion of the corporate tax base.
President Obama’s proposed Framework for Business Tax Reform calls for creating greater parity in the tax treatment of large corporations and passthrough businesses, such as partnerships, by taxing passthrough businesses as corporations. However, a recent study by Professor Postlewaite, Harry R. Horrow Professor of Law and director of the Tax Program at Northwestern University School of Law, funded, in part, by the Private Equity Growth Capital Council, argues that this proposal reverses the trend toward tax neutrality and the simplification of the tax code. In his analysis, Professor Postlewaite discusses the flaws in the proposal’s assertions and describes a history of tax policies that provided more tax neutrality across business types.
“The logic for the proposal is undercut by the evolution of the tax law over the last 30 years, which has embraced single-level taxation as the standard for business tax neutrality,” writes Postlewaite. “The evolution of the tax law over the last 30 years confirms that the preference for a double tax paradigm is a thing of the past.”
In his analysis, Postlwaite suggests that rather than raising revenues, sound tax policy should focus on equity, efficiency and simplicity. Proposals to apply a double layer of taxation to large passthrough entities—such as the one offered by President Obama— run counter to those principles.
“Businesses organized as partnerships, limited liability companies, S-corporations and sole proprietorships account for more than half of all jobs in the U.S., employing more workers than C-corporations in nearly every state,” said Steve Judge, president and CEO of the Private Equity Growth Capital Council. “Increasing taxes on partnerships by imposing an entity level tax is exactly the wrong policy at a time when making these businesses, our nation’s jobs engines, more competitive in a global economy should be a priority.”
Private equity partnerships have invested more than $1.7 trillion in 15,500 U.S. companies in the past 10 years, with investments in businesses located in all 50 states. These investments support jobs for more than eight million employees worldwide.
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To learn more about the issue of passthrough taxation, click here.
