Wednesday, April 3, 2013
New York Times DealBook: A Plan to Simplify the Tax Code That May Be Too Simple, by Victor Fleischer (Colorado; moving to San Diego):
Last month, Dave Camp, the chairman of the House Ways and Means Committee, released a draft proposal to change how we tax certain types of businesses known as pass-throughs. ... Mr. Camp’s proposal includes two options.
The first option addresses what we might think of as deferred maintenance — cleaning up some corners of the tax code that have been neglected. For example, it would relax the anachronistic eligibility restrictions for subchapter S corporations. For partnerships, the proposal would repeal the confusing rules related to “guaranteed payments.” It would also make some useful changes to the partnership tax rules related to basis adjustments and revise some outdated definitions.
The second option, a more radical one, appears to be a stalking horse. This would replace our existing system with a unified set of rules for pass-throughs. This sounds simple and appealing. Many of the ideas in Option 2 are promising, but they are largely untested and not fully explained in the proposal....
In my view, there’s an additional problem with Mr. Camp’s proposal: its failure to address how the partnership tax rules are now being used, and abused, by large businesses. The partnership tax rules were originally created for small business, so a small number of individuals could work in a business together and mix together labor and capital without having to pay an extra layer of tax. The rules are now used in ways that Congress never intended. Two examples are the erosion of the corporate tax base and the tax treatment of carried interest. ...
Of course, Mr. Camp has pitched the proposal as being about simplification of the tax rules for small business. Avoiding the topic of carried interest is consistent with that message. But if Mr. Camp wants to raise some revenue to pay for tax changes elsewhere, like a reduction in the corporate tax or a shift to a territorial tax system, he will have to follow the money to where it disappears — through loopholes like carried interest and the abuse of the publicly traded partnership rules.