TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, December 11, 2017

Shaviro: 23% Pass-Through Rate Is 'Single Worst Proposal Ever Made In The History Of The Income Tax'

New York Times, Same Income, But Not Taxes, in GOP Plans:

In most places, a dollar is a dollar. But in the tax code envisioned by Republicans, the amount you make may be less important than how you make it. ...

[For] the first time since the United States adopted an income tax, a higher rate would be applied to employee wages and salaries than to income earned by proprietors, partnerships and closely held corporations.

The House and Senate bills vary in detail, but both end up linking tax rates to a whole new set of characteristics, like ownership, level of involvement, organizational structure or even occupation. These rules, mostly untethered from income level, could raise or lower tax bills by hundreds or thousands of dollars for ordinary taxpayers and millions of dollars for the largest eligible businesses.

“We’ve never had a tax system where wage earners were substantially penalized” relative to other types of income earners, said Adam Looney, a senior fellow at the Brookings Institution and a former Treasury Department official. ...

Supporters argue that the revised tax regime is an attempt to update the code to reflect changes in the economy. Rather than depend primarily on individual rate cuts to further power the economy, the Republican plans focus on cutting taxes on certain types of business income. The idea is that these businesses will reinvest those higher returns and stimulate growth.

“This is a radically different approach,” said Fred Goldberg, commissioner of internal revenue under President George H.W. Bush. ...

Indeed, economists and tax experts across the political spectrum warn that the proposed system would invite tax avoidance. The more the tax code distinguishes among types of earnings, personal characteristics or economic activities, the greater the incentive to label income artificially, restructure or switch categories in a hunt for lower rates.

Expect the best-paid dentists to turn into corporations so they can take advantage of the new 20 percent corporate tax rate, instead of having to pay a top marginal rate of nearly 40 percent on some of their income. Individual income taxes can be deferred on profits left inside a corporation instead of deposited in a personal account. What’s more, corporations can deduct local and state taxes, which individual filers can’t.

Look for a wave of promotions as staff lawyers on salary suddenly turn into partners to qualify for the 23 percent deduction the Senate bestowed on pass-through businesses. ...

Pass-throughs, which range from an ice cream stand to multibillion-dollar operations like Georgia-Pacific (a Koch Industries subsidiary) and Fidelity Investments, don’t pay corporate taxes. Instead, they pass through income to their owners or shareholders, who pay taxes at the ordinary rate on their individual returns.

The Republican provisions applying to pass-throughs have been singled out for some of the greatest scorn. Writing about the House version, Dan Shaviro, a professor of taxation at New York University Law School who worked on the 1986 tax overhaul, said it “might be the single worst proposal ever prominently made in the history of the U.S. federal income tax.”

http://taxprof.typepad.com/taxprof_blog/2017/12/shaviro-23-pass-through-tax-rate-is-single-worst-proposal-ever-made-in-the-history-of-the-income-tax.html

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