Trump administration officials and congressional Republicans spent the past weekend continuing to insist that their tax reform plan is all about helping the middle class and making the tax system simpler and easier to navigate. President Trump’s “priority all along is [to] fix a broken system,” said Treasury Secretary Steven Mnuchin on “Face the Nation,” adding that the plan is all about helping the “middle class” and “working families.”
Au contraire. What Trump and congressional Republicans will really accomplish if their plan becomes law is to further rig the tax system in favor of the wealthiest Americans.
A new report from a group of 13 prominent tax experts including Lily Batchelder at New York University School of Law and distributed by the liberal Center on Budget and Policy Priorities provides the most detailed explanation yet of how this bill will encourage the wealthy to pursue all sorts of tactics in service of what accountants call “tax avoidance.” This is, of course, almost certainly not what most voters thought they were getting when Trump promised to “drain the swamp” during last year’s presidential campaign.
The report claims the bill would encourage use of corporate tax shelters, incentivize high-income people to turn themselves into businesses to obtain lower-income tax rates, and encourage runarounds solely designed to help individuals owe less money to the federal government at the end of the year.
Taken altogether, the Republican tax reform plan is “a substantial blow to the integrity of the income tax,” the authors of the report write. By this they mean that the plan doesn’t just incentivize gaming the system; it also seemingly favors some professionals — like, say, real estate investors — over other professionals like doctors.
Even as Republicans claim they are offering a majority of Americans a simplified system, the bill increases the complexity of the code in ways that almost certainly will offer more, not fewer, opportunities for people wealthy enough to hire high-priced accountants and lawyers to advise them on strategies to pay less in taxes.
As Congress reconciled the House and Senate version of the tax reform bill, it closed some loopholes, while managing to open others.
The report focuses on “pass-through” businesses, which happen to be quite popular in the real estate business. The bill creates a new tax rate for so-called pass-through income for businesses that don’t pay corporate taxes, such as partnerships, limited liability companies and S-corps. This would allow people who previously paid (theoretically) full income tax rates to form entities enabling them to reclassify their income and receive a deduction of 20 percent on qualified income. This , as the report points out, “reduces the top tax rate from 37% to 29.6%.”
Earlier iterations of the bill attempted to incentivize hiring by requiring pass-throughs to employ wage-earning workers in order to take advantage of that lower rate. But let’s say you are, perchance, a commercial real estate developer (like, uh, Donald Trump)? Yep: You can now qualify even if you don’t have wage-earning employees, as long as your business happens to, as the report puts it, “own and use depreciable tangible property like buildings or automated machines that replaced their employees.” In other words, possessing property allows some favored groups to enjoy more favorable tax treatment than others.
On that note, employees or no employees, the current bill does continue to ban doctors, lawyers, accountants and those in the performing arts, among others, from making use of this provision. But the report points out that this will actually encourage them to game the system in other ways. For instance, the report notes, such a professional can still form and choose to work through a C-Corporation, a different beast than a pass-through. (Read the report for lots more examples.)
The Internal Revenue Service will not be able to keep up with all of this gaming. The IRS’s annual budget, adjusted for inflation, is down by 18 percent since 2010. Partly as a result, staffing at the agency is down by 23 percent. Even as the demand on the agency will increase as a result of this tax plan, the proposed Trump administration budget includes more cuts in IRS funding.
All of this cries out for a slowed-down process and an open airing of the issues involved. Instead, we’ve received a frantic push, nothing in the way of public hearings, and a highly secretive process. Congress plans to pass the bill this week, and Trump wants to sign it before Christmas. The rush might have something to do with the fact that almost every poll shows it remains staggeringly unpopular. Giving everyone time to evaluate its pros and cons would almost certainly reduce the chances it ever becomes law.
This isn’t draining the swamp. Instead, the tax code under Trump will incentivize the rich to use the tax system to grow their wealth, and almost certainly exacerbate income and wealth inequality further. This is a money grab by the top one percent — nothing more and nothing less.