Wealthy Americans appear to have found a way to get around one of the taxes they are supposed to be paying under Obamacare, according to federal data.
The nonpartisan Joint Committee on Taxation, a congressional agency, published new numbers Tuesday projecting a surcharge on profit from rich taxpayers' investments would produce less revenue than they'd previously predicted. Indeed, the committee shaved about a quarter off its revenue projection from the one it submitted last year, cutting the estimate by more than $60 billion.
The committee, as is typical for its guidelines, did not provide an explanation for the projection in reduced revenue, but tax experts said they think it might be because the wealthy are getting around the law.
This tax on investments “has been eroded over time as taxpayers have kind of figured out ways to put income into untaxed forms,” said Mark Mazur, the director of the nonpartisan Tax Policy Center. “Taxpayers' planning techniques change over time, so you would see it in the estimates with a lag.”
“In the last several years, Treasury has reported that we’ve seen some significant tax avoidance,” said David Kamin, a former economic adviser in Obama's White House. “This may be one reason why JCT has reduced its estimate.”
The tax in question is a 3.8 percent fee on gains from certain investments, but it only applies to individual taxpayers with more than $200,000 in annual income or to married couples making more than $250,000.
There are a few ways that wealthy taxpayers can avoid the tax. One approach is for taxpayers to place investments in a legal entity known as an S corporation, and then to pay themselves a salary out of the corporation's funds. The S corporation's profits are not technically salaries or wages, so they are not subject to payroll taxes. At the same time, because a taxpayer is an employee of their own corporation, the profits do not qualify as the kind of indirect, passive income that would be taxed.
In a 2016 report calling for changes, analysts in former president Barack Obama's Treasury Department said that taxpayers who use this technique pay the tax on just 42 percent of the income from their S corporations.
There is an alternative possible explanation for the drop in projected revenue, Mazur said. The committee may be using a more pessimistic estimate of how much profit wealthy taxpayers will see from their investments, and therefore how much tax they'll pay on them.
Whatever the cause, the committee projected that repealing the tax would eliminate $223 billion in revenue over the coming decade. The committee's new prediction is that a similar repeal would cost just $158 billion, indicating that the staff expects substantially less money from the tax than they did last year.
Part of the discrepancy is that last year, the committee estimated the effect of repealing the tax immediately, while this year, the committee considered a proposal to delay the repeal for one year. The government would be able to collect some additional revenue during that extra year.
The change in the committee's estimate has political implications for Republicans as they work to repeal Obamacare (officially known as the Affordable Care Act) — including the law's tax on investment income.
Republicans are using a special procedural maneuver known as reconciliation to advance their proposals through Congress. The maneuver allows them to avoid a filibuster from Democrats in the Senate, but it also requires Republicans to present a bill that would not result in more forecast borrowing by the federal government.
Under the old estimate, Republicans would have to find new spending cuts, new revenue or some combination of the two to make up for the full $223 billion in projected lost revenue. The new formula cuts the task down to making up only $158 billion in lost revenue.
The Congressional Budget Office is expected to publish its official analysis, incorporating the revision, in the coming days.
Republicans generally argue against increasing taxes on the wealthy to pay for social services, such as the financial help offered to ordinary families buying health insurance under Obama's Affordable Care Act. For Republicans, these taxes penalize the rich for working, investing, and contributing to the economy.
But Kamin, Obama's former adviser, argued that Republicans are pushing a giveaway to wealthy taxpayers.
“These are major tax cuts, providing very significant tax relief to people at the top,” Kamin said of GOP plans to scrap the tax. Instead, he said, the GOP should take "the opportunity to simply close these loopholes so that this tax would raise the revenue that it was supposed to in the first place.”