It’s that time of year again. Some of us will get nice gifts, while others will get lumps of coal.
But the rules have changed a bit this time, at least as far as the federal government is concerned. The St. Nick you knew is on vacation, possibly permanently. In his place we have Republican Tax-Cut Santa, who has different priorities.
You see, the new guy doesn’t care whether you’re naughty or nice. In fact, he’ll actually reward you if you’re naughty in the right ways. But mainly he cares whether you’re rich, especially if your wealth comes from property (preferably inherited property), not hard work. In that case, you get a really big gift. If you’re an ordinary working family, not so much — and eventually you get that lump.
So let’s talk about whose stockings will be stuffed by the tax bill Republicans just rammed through without a single hearing or a single Democratic vote.
The centerpiece of the legislation is a huge tax cut for corporations. Republicans claim that this tax cut will be passed on to workers in the form of higher wages, but most independent studies conclude that even in the long run only between one-fifth and one-quarter of the tax cut will trickle down to workers. And the fraction will be much lower in the short run — say, the next few years. So this is basically a tax cut for shareholders.
And who are these shareholders? About a third of the total benefits will go to foreigners. Among U.S. residents, while many people have some stock in their retirement accounts, those amounts are generally small. Even including indirect holdings through mutual funds, the top 1 percent of domestic households owns 40 percent of stocks, the bottom 80 percent just 7 percent. So when Tax-Cut Santa comes to town, it’s definitely good to be rich.
Meanwhile, complicated things will happen to individual taxes: Some deductions will increase, others will be cut. Next year, most people will probably see a small tax cut, although for the middle class it will be a smaller cut than the one they got from Barack Obama in 2009 — a tax cut almost nobody noticed.
Crucially, however, while the corporate tax cut is permanent, all these individual goodies are set to erode over time, then expire, so that when the law is fully implemented, most middle-class families will see their taxes rise.
Republicans claim that we shouldn’t take this prospect seriously, because future Congresses will extend the individual breaks — that is, they’re saying that their own law is so bad that it won’t be implemented as written. And remember, that’s supposed to be a defense of the bill.
Now comes the fun part — the part where it pays to be naughty.
You see, the second most important piece of this tax bill, after the corporate tax giveaway, is a drastic tax cut for business owners, who will end up paying much less in taxes than people with the same income who work as someone else’s employee.
It’s hard to come up with any good rationale for this move, which will discriminate among taxpayers in a way that bears no relationship to any coherent policy goal. It will, however, offer a big financial windfall to a number of elected officials, especially Donald Trump.
And it will also open the door to a lot of tax-system gaming.
The obvious trick is to keep doing exactly what you’re doing now, but redefine yourself as an independent contractor rather than an employee. The bill contains rules that would supposedly limit that kind of abuse, but tax experts have already found huge loopholes. And these experts were just a handful of people working pro bono for a couple of days. Over the months ahead, as thousands of top-dollar accountants and lawyers get to work, expect to see many more routes to tax avoidance emerge — but only for the rich and well connected.
Consider one example we already know about. Imagine a partnership involving several doctors. Under the new rules, such a service business won’t qualify for the tax break (although it would if they were architects. Why? Who knows?). But the doctors can get around the rule by buying the building they work in, then charging themselves an exorbitant rent. Voilà! They get to pay much lower taxes — because real estate investment trusts, strange to say, do get the big tax break.
Or suppose some of my colleagues form an economics consulting firm. Such a firm won’t qualify for tax breaks. But suppose they also start selling nerdy T-shirts (“Economists do it with models”). With a little hocus-pocus, as I understand it, they can basically define themselves as a T-shirt business, and pay much less in taxes.
The point is that there will be hundreds of tax-avoidance games like these, costing taxpayers billions if not hundreds of billions in lost revenue. But only those who are both affluent and sneaky will be able to play these games. As I said, Tax-Cut Santa actually rewards you if you’re naughty, as long as you’re naughty in the right way.
And what about those promises that rich people wouldn’t get a tax cut, that the tax system would get simpler, that you’d be able to file on a postcard, and all that? All I can say is, ho ho ho.
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