Forbes: Law Professor Argues New Pass-Through Rules (199A) Are Horrible, by Peter J. Reilly:
When it comes to new Code Section 199A (often referred to as the pass-through rules) and Professor Daniel Shaviro of NYU, don't get him started. He had his piece Evaluating The New US Pass-through Rules published in a UK journal — The British Tax Journal — because he thought it was not representative of how temperate he normally is. Here is how it starts (You have been warned):
The pass-through rules that the US Congress enacted in 2017—permitting the owners of unincorporated businesses in favoured industries to escape tax on 20 per cent of their income—achieved a rare and unenviable trifecta, by making the tax system less efficient, less fair, and more complicated . It lacked any coherent (or even clearly articulated) underlying principle, was shoddily executed, and ought to be promptly repealed. Given the broader surrounding circumstances, the mere fact of its enactment sends out a disturbing message about disregard among high-ranking US policymakers for basic principles of competence, transparency, and fair governance.
I'm kind of a cynical bastard, but it is nothing compared to Professor Shaviro. He starts his article by comparing the passage of 199A to gilded age corruption. He is particularly hard of Senator Bob Corker of Tenessee who put aside his anti-deficit stand when the pass-through rules were modified so that owners of tangible property with no or negligible wage expense would also qualify for the deduction. That provision (199A(b)(2)(B)(ii)) became known as the Corker kickback.
The most interesting part of the paper is where Professor Shaviro tries to divine the rationale behind 199A. When I spoke to him, he indicated that he is speculating rather than having listened to the tapes from the smoke-filled room where the plan was hatched. The theory is that the Republicans had to deliver something to their donors.
The corporate tax cut actually has some economic thinking behind it in terms of making the country more competitive. And a corporate rate substantially lower than the individual rate has a logic to it, because there is an extra layer of tax before you can spend the earnings on steak and champagne and your fifth house.
The problem is that the corporate tax cut is a more a thing for the billionaire class and Wall Street. What about mere multi-millionaires on Main Street? The theory is that the supporters of individual Republican congressmen are people of more modest means. You know. The kind of guy that owns a couple of dealerships and a few strip malls. ...
While the impetus to demand such rules could be viewed purely in terms of economic self-interest, it also appears to the author to have closely linked psychological and ideological elements. Powerful people, who might be accustomed to getting what they want immediately, yet who are sufficiently insecure and anxious about their power in an electoral democracy to crave continual repetition (both to themselves and others) of the claim that they are the society’s “makers” (not “takers”) and “job creators”, may gravitate naturally to demanding special treatment.43 Loyalty to their own social group may also incline them to favour, for psychological as well as revenue reasons, denying their specially crafted tax benefits to others whom they do not view as part of their own group sociologically, even if those others, such as successful members of the educated professions, are both formally and substantively fellow “business owners
[M]aybe 199A is not so bad, even though it seems likely that it might not have been thought through that well. After all, it is better to be lucky than good.
Dan Shaviro (NYU), Reilly on Shaviro on the Pass-Through Rules:
It's a fun response by Reilly, and insofar as he disagrees with me it's because my noting that the provision will require business people to "pay large sums to tax lawyers and accountants to figure out how best to structure their arrangements with an eye to minimizing federal tax liability" is good news for accountants such as him. "So a small portion of those large sums is coming my way."
Reilly also quotes my noting, in the article, that the motivation for the pass-through rules appears to be sociological - aimed at rewarding members of the business elite while excluding member of the more educated professional and academic elites, simply because these are self-consciously distinct groups and the former were driving the bus in 2017.
He responds that this mistakenly classifies accountants as part of the educated classes and the intellectual elite. That may well be right, if one looks just as accountants from a sociological standpoint. But in the 199A list of professions banned from getting the 20% tax cut (other than below income phase-out), accountants were unlucky enough to get grouped, based on prior statutory precedents, with the likes of lawyers, doctors, and artists.
BTW, on a related note, I recently heard through the grapevine an explanation of why, at the last moment in the 2017 enactment process, architects and engineers were taken out of the professional classes' exclusion from full pass-through benefits. The word is that Bechtel told their Congressional patrons (or servants?) to take out engineers, and architects got pulled too because the two groups were listed right next to each other, and a second deletion was thought useful in obscuring the political deal.