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Politics

A feast for regulatory parasites

Catherine Rampell on

Say you work as a chef at a restaurant. Your tax rate will vary tremendously depending on whether you call yourself an employee, an independent contractor receiving pass-through income for your labor or a corporation contracting out your services to the restaurant.

There are also complicated, as-yet-unsettled new criteria for determining how much of your income qualifies for which rate, as well as what expenses can be deducted. All this creates a mind-boggling number of possible tax-planning permutations for the exact same job.

Or consider the proposed changes to taxation of overseas profits, which would also lead to new opportunities for intricate tax scheming.

Here, too, Congress would effectively create two parallel regimes -- one for income earned abroad and one for income earned at home. With these two regimes come incentives to invest in tax attorneys who can find ways to game the system -- including whether and how to shift operations, jobs and paper transactions overseas.

Tax experts are already identifying this sloppily written bill's glitches and drafting errors. Some of these have been laid out in a new 35-page paper, written by 13 tax professors and lawyers.

They note that one provision, for example, would encourage U.S. companies to sell goods abroad, only for them to be sold right back into the United States. The interaction of two other provisions would encourage companies to make investments that they know would lose money.

And so on.

"The tax code ought to be about defining a base as broadly as possible, keeping tax rates as low as possible, and removing taxes as a calculation for how you order your economic affairs," Rosenthal says.

This plan, he says, does the opposite.

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It will lead more businesses to make decisions based not on market demand, not on where the biggest economic opportunities lie and not on what kind of innovations, investments and expansions hold the most potential, but where the biggest loopholes are. So much for making the U.S. economy more competitive.

The haste with which this bill is being written and voted on -- before the public or even lawmakers have time to fully understand what's in it -- will do more than just distort business decisions. It will also likely cause the plan to cost considerably more than estimated, as New York magazine's Jonathan Chait has pointed out.

That's because the staffers at the Joint Committee on Taxation, Congress' official scorekeepers on tax bills, haven't been given sufficient time to identify and model all the ways in which the tax profession will take advantage of accidental loopholes -- especially as IRS funding gets slashed.

Congress has a pretty simple choice, in fact. It can slow down, find and fix those loopholes now. Or it can let all the regulatory parasites find and exploit them later.

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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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