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ACA Repeal Would Embolden Tax Avoidance

January 23, 2017 at 1:00 PM

We’ve explained that repealing the Affordable Care Act (ACA) would dramatically undermine health coverage (with 32 million more people uninsured by 2026) while delivering windfall tax cuts to high-income people (averaging about $7 million apiece annually to the top 400 households). It would also embolden business tax avoidance, as our new paper explains.

The Republican repeal bill is expected to eliminate ACA provisions that help prevent business tax shelters and raise penalties on tax avoiders. That could embolden tax lawyers, accountants, and businesses to devise and use complex tax-avoidance schemes — even as Republicans are planning to pursue fundamental tax changes later this year that could create new tax-avoidance opportunities.

The ACA revised the tax code to clarify and strengthen the “economic substance doctrine,” which helps prevent businesses from making transactions that have either no economic effect or no business purpose other than avoiding tax. The ACA also raised penalties on businesses that underpaid taxes by using these kinds of transactions. Members of both parties had backed legislation to accomplish these goals for many years before the ACA; for example, Senator Chuck Grassley, then chairman of the tax-writing Senate Finance Committee, called in 2007 for enacting similar provisions “because it’s the right tax policy.”

If the forthcoming ACA repeal bill mirrors the repeal bill that President Obama vetoed in 2016, it will eliminate the economic substance doctrine provisions from the tax code. That would cost $5.8 billion from 2016 through 2025, the Congressional Budget Office estimated. The cost could ultimately be bigger if Republican lawmakers enact a large tax package in 2017 that changes business taxes significantly, which, in turn, would likely spur activity by lawyers and accountants to game the new system.

In other words, Republicans are proposing to strike these provisions from the tax code just when we most need a clear doctrine with strong penalties against tax avoidance. That’s yet another reason why repealing the ACA is bad tax policy, on top of being disastrous for the health and financial security of millions of Americans.


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