BEYOND THE NUMBERS
We’ve previously explained that the 2017 tax law disproportionately benefits the wealthy, is fiscally irresponsible, and invites rampant tax gaming. In testimony yesterday to the Senate Finance Committee, New York University Law School Professor David Kamin and Brooklyn Law School Professor Rebecca Kysar highlighted these and other flaws.
Professor Kamin noted that the law adds $1.9 trillion over the next decade to budget deficits at a time when the nation needs more, not less, revenue. In addition, it provides the largest benefits to the highest-income Americans and will likely “leave a typical American family worse off in the end, as key programs and investments are threatened to pay for tax cuts which we know give outsized benefits to those with high incomes.” True tax “reform,” he noted, includes raising more revenue, not less; asking more from the top, not less; and reducing arbitrariness and complexity. In contrast, Kamin said:
The [2017 tax law] is a bonanza for tax planning by preferentially taxing certain kinds of income and drawing complex, arbitrary, and unfair lines. The new reform fundamentally undermines the integrity of the income tax by expanding preferential taxation of income earned in certain ways but not in others. Corporations can now be used as tax shelters to avoid the top individual rate. Alternatively, people in the right sectors or with good tax counsel can take advantage of the new deduction for certain kinds of “pass-through” businesses — but only very certain kinds.
The 2017 tax law creates a 20 percent deduction for certain pass-through income, which the owners of businesses such as partnerships, S corporations, and sole proprietorships report on their individual tax returns and which, before this new law, was taxed at the same individual tax rates as the business owner’s other ordinary income. During the hearing, Kamin called this new deduction “one of the worst provisions that’s been added into the tax code in the last several decades,” noting in his testimony:
This pass-through deduction represents the very worst kind of tax policy, picking winners and losers haphazardly in a complex tax provision, and then generating significant incentives for people to rearrange their businesses to try to get on the right side of the line. And these kinds of tax-planning opportunities throughout the bill mean the legislation seems likely to lose even more revenue — and give even more benefits to the best off — than initial estimates suggest.
Professor Kysar, likewise, described the pass-through tax break — which we recently discussed here — as particularly poor tax policy. Her main focus was the law’s international corporate tax provisions. The law moves the U.S. tax code towards a “territorial” system, which will mean that large swaths of U.S. multinationals’ foreign profits are effectively exempt from U.S. corporate tax. That basic structure is a powerful incentive for companies to report profits — or even shift operations — abroad, so the law added a complex series of rules to attempt to limit those effects. But, according to Kysar’s testimony, these rules perversely create their own incentives to shift profits and operations offshore. Among the flaws that Kysar describes in detail are:
- The 2017 tax law creates a 10.5 percent minimum tax on foreign profits, but it is “not a sufficient deterrent to profit shifting because the minimum tax rate is, at most, half of the 21% corporate rate.” Further, Kysar noted that the way the tax is calculated “encourage[s] firms to move real assets, and accompanying jobs, offshore” since locating these assets (such as factories) abroad allows some of its income to be exempt from the minimum tax.
- The new law also includes a deduction that results in a lower tax rate for (intangible) income from certain exports made by U.S. multinationals. Like the minimum tax, this deduction’s calculation creates an incentive for companies to move assets offshore. The deduction is also vulnerable to challenge under World Trade Organization rules, creating instability and uncertainty in the tax system. Moreover, “[f]irms may also be able to take advantage of the … deduction by … disguising domestic sales as tax-preferred export sales” to obtain the lower rate, she noted.
- The law has rules intended to reduce foreign-owned companies’ ability to shift offshore profits generated in the United States to avoid the U.S. corporate tax. But Kysar detailed the ways in which these rules “can be readily circumvented.”
During the hearing, both Kamin and Kysar stressed that the new law was a missed opportunity to achieve true tax reform that would move the tax code in the right direction. As Kamin’s testimony concludes, “true tax reform should continue to be on the agenda — a reform that undoes the damage of this bill and takes our tax system in the right direction.”