Law professors published a 34-page list of ways people will game the GOP tax plan

paul ryanAFP

  • The Republican tax bills, passed with lightning speed,
    are turning out to be full of kinks.
  • A group of law professors analyzed the plan and wrote a
    paper about some of its unintended consequences.

Because they were rushed through Congress at lightning speed and
with barely more editing than your average blog post, the
Republican tax bills are turning out to be full of kinks.

Some of these mistakes—like the $289 billion tax
hike on corporations senators accidentally wrote into their
law at the last minute—have been widely covered. But many others
are just being discovered. “The more you read, the more you go,
‘Holy crap, what’s this?’” Greg Jenner, a former top tax official
in George W. Bush’s Treasury
Department, told Politico this week. “We will be
dealing with unintended consequences for months to come because
the bill is moving too fast.”

This week, a group of 13 tax law professors and lawyers, many of
whom have been vocal opponents of the Republican plan, published
a 34-page paper offering a taste of what those unintended
consequences might be. You know how people have been joking about
incorporating themselves ever since these tax bills started
kicking around? That’s almost certainly going to be a thing.

Investors may be able to shelter their investment profits by
stuffing them into C-Corporations, which are in line for a low,
20 percent tax rate. Many individuals could save on their income
taxes by gaming proposed tax breaks for passthrough
businesses—firms like partnerships and LLCs that aren’t subject
to the corporate rate. Baseball players will probably start
separate companies to collect all of their endorsement and
licensing royalties while saving on taxes. A law firm could split
itself into multiple pieces in order to minimize its associates’
IRS bills. Here’s how that last scheme would work:

Law firm associates, LLC. Under the
Senate bill, there is potentially a major problem as drafted:
Employees may be able to benefit from the pass-through provision
by forming a pass-through of which they are an owner. To achieve
the tax savings, no longer be an employee (who cannot benefit
from the provision); instead be an owner (who can benefit from
the provision).

For example, law firm associates (and other employees of the
firm) should no longer be mere associates. They should instead be
partners in Associates, LLC—a separate partnership paid to
provide services to the original firm. Their “profit share”—in
lieu of salary—from Associates, LLC would then be given the
special low pass-through rate. There are restrictions on
lawyers—since they provide a personal service, which is
disfavored in the bill—from benefiting from the special
pass-through rate, but those restrictions would not apply to
these associates.

So long as the associate (or really partner in Associates,
LLC) makes less than $500,000 in taxable income (for a married
couple) or $250,000 (for a single individual), they would be
fully eligible. And that covers a lot of law firm associates, not
to mention many other people who are now employees—but who may
not be for long.

Some of the issues the professors found aren’t loopholes so much
as unintentionally perverse incentives that could, for instance,
encourage companies to shift employment and investment overseas
(which is the exact opposite of what this bill is supposedly
intended to do). But rather than run through each problem,
one-by-one, I’d rather make a few big picture points.

First, as the paper’s authors note, all of these loopholes
suggest that the GOP’s tax plans will cost far more than the
Joint Committee on Taxation has officially projected. The JCT
appears to think that the bill’s anti-abuse provisions are good
enough to keep revenue from leaking out. Given what we’re
learning, that is probably a fanciful assumption.

Second, it’s not clear how worried Republicans are about these
loopholes, if at all. Some may even see them as a plus. The party
is attempting to cut taxes as deeply as possible, and—other than
Sen. Bob Corker—its members have largely treated deficit
restrictions as annoyances to be worked around. My guess is they
won’t put a ton of energy into making sure their final bill is
air tight, especially since lobbyists aren’t likely to make much
noise about mistakes that could save their clients money.

Finally, if Democrats do ever win another federal election,
they’ll have to spend a lot of time fixing the half-considered,
rough-draft of a tax code Republicans are busily slapping
together. That means not just talking about how much to raise
rates on the wealthy, but thinking about how to restructure and
rationalize the system. The sooner they start considering that,
the better; after all, we’ve just seen what happens when you try
to write a bill the night before it’s due.

Read the original article on Slate. Copyright 2017. Follow Slate on Twitter.

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