The Perverse Incentives And Self-Dealing In This Tax Scam Are Something To Behold

We all know how truly horrendous this tax bill really is with probably the greatest transfer of wealth from the lower and middle income Americans to the richest among us. It is already incredibly unpopular. The haste and lack of hearings and analysis will lead to massive unintended consequences. Today, the conference committee announced that they had an agreement in principle on the final bill but the details and changes have not been totally revealed. But the Republicans will once again go ahead and vote on that bill without having an independent analysis of the final bill’s effect.

One of the more odious aspects of this bill is just how much the people writing and voting on the bill are lining their own pockets. As an example, John Cornyn added a seemingly obscure tax break for pipeline companies specifically benefitting his fellow Senator Ted Cruz and two other senior Republican members of the Texas delegation. All told, “16 lawmakers — 13 Republicans, three Democrats — own multimillion-dollar stakes in the special investment vehicles that stand to benefit from Cornyn’s amendment. They include three of members of the Texas Congressional delegation: Sen. Ted Cruz and two top Republicans in the U.S. House.”

Trump has apparently been barraged by his fellow club members at Mar-a-Lago about tax bill’s negative effects on them. So, miraculously, today the conference committee needed to reconcile the top marginal tax rate which the House kept at 39.6% and the Senate reduced to 38.5%. Their solution was truly remarkable, namely to further reduce the top marginal rate to 37% as well as compromising on the mortgage tax deduction limit at $750,000.

The haste with which the bill was written has also created unintended consequences and will certainly create more in the future. I have already written about the violations of international trade rules and tax treaties in the bill. Another example is the Wall Street Journal’s report on some higher income earners seeing their marginal tax rate exceed 100%. According to the Journal, “Consider, for example, a married, self-employed New Jersey lawyer with three children and earnings of about $615,000. Getting $100 more in business income would force the lawyer to pay $105.45 in federal and state taxes, according to calculations by the conservative-leaning Tax Foundation. That is more than double the marginal tax rate that household faces today. If the New Jersey lawyer’s stay-at-home spouse wanted a job, the first $100 of the spouse’s wages would require $107.79 in taxes. And the tax rates for similarly situated residents of California and New York City would be even higher, the Tax Foundation found.”

The current bill makes big changes in tax preference for pass-through entities that will result in a massive amount of wasteful economic activity in an attempt to game the system. We already have a textbook example of how this occurs in the Republican utopia that resulted in an economic nightmare in Kansas. As a former Treasury Department official noted, “I would expect a huge tax-gaming response once people fully understand how it [the current bill] works. The payoff for gaming is huge, within the set of people who both face these rates and have flexible enough business structures.”

The Republican party loves to talk about the dignity of work and espouses the belief that citizens should work in order to receive government benefits. Remarkably, however, the current tax bill actually creates incentives not to work. Beyond the repeal of the estate tax which will allow the children and grandchildren of billionaires not to work a day in their life, there is the aforementioned marginal tax rate greater than 100% that will actually incentivize people not to work after making a certain level of income. In addition, the preferential 25% rate on pass-through income actual rewards business owners who are passive investors over the very same business owner who continues to work at the job. The bill will actually encourage business owners to step away from their day-to-day activities at the firm and instead reap the profits of the company through a pass-through entity that will be taxed at a lower rate than the income the owner made when he was working.

As Paul Krugman says, “Awesome, and stupid. The bill hugely prioritizes business owners over employees, and within business owners, those who just collect profits over those who work for their money.” And that pretty well sums up the values of the Republican party.

Originally published at tidalsoundings.blogspot.com on December 13, 2017.

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