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Who wins biggest in the GOP tax plan? The lazy rich.

Catherine Rampell on

But the bill's differential treatment of those who work and those who don't is starkest in provisions related to "pass-through" entities.

Almost all businesses in the United States are structured as pass-through businesses, such as partnerships, sole proprietorships and S-corporations. This means their incomes are taxed at individual rates, rather than corporate ones. Despite the usual rhetoric, these businesses are not necessarily "small"; the Trump Organization, for instance, is organized as a pass-through.

The Republican tax plan would dramatically slash tax rates for pass-through income, down to no more than 25 percent. This special pass-through rate is much lower than the normal top marginal rate for individual income, which would continue to be 39.6?percent.

As you might imagine, a gap in tax rates is likely to create a tax-sheltering bonanza. Lots of high-income people currently working as employees would likely start calling themselves "companies" to take advantage of the lower rate.

The bill also includes some "guardrails" to discourage people from gaming this system. At least in theory.

Among them is a rule that says if you're actively involved in your business, typically only a portion (30 percent) of your earnings would qualify for the special pass-through rate. The rest of your earnings (70 percent) would be considered equivalent to the wages you'd pay yourself for your work at the firm. Accordingly, these would be taxed at regular individual income-tax rates.

But here's the rub. This 70-30 rule would apply only if you're "actively" working for the company you own. If instead you're considered a "passive" owner -- determined by, for example, how many hours you log working for it -- then you inexplicably qualify for the special pass-through rate on 100 percent of your earnings.

Consider a hypothetical, similar to one New York University School of Law's Lily Batchelder suggested to me recently: A family business has been passed down to several siblings with varying levels of industriousness and IQ.

The most competent sibling works for her family's company full-time. The least competent sibling kicks in a few hours of work each year, but otherwise spends his time popping bottles of champagne and hunting endangered wildlife.

Under the Republican tax bill, the lowest tax rate is paid by the ne'er-do-well brother, rather than by the worker-bee sister who actually grew the business. Although, with a good enough accountant, she might be able to convince the Internal Revenue Service that she's just as lazy and uninvolved as her brother.

This is a strange way to design tax incentives. As New York University law school professor Daniel Shaviro has noted, our existing tax code typically incentivizes people to avoid being classified as passive and instead to prove that they're "materially participating" in running their business. This bill encourages rich people to do the opposite.

So much for the dignity of work.

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Catherine Rampell's email address is crampell@washpost.com. Follow her on Twitter, @crampell.

(c) 2017, Washington Post Writers Group

 

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