Rampell: Republican tax plan a feast for ‘regulatory parasites’

For all these reasons, Republicans have said that simplification is one of their primary goals in overhauling the tax code. And it’s true that their proposal to nearly double the individual income tax’s standard deduction would streamline tax preparation for many households.

But on the corporate side — and for higher-income individuals who may soon decide to self-incorporate — it’s a different story.

“The amount of complexity they’re adding is staggering, just unbelievably staggering,” fumes usually mild-mannered Steven M. Rosenthal, a senior fellow at the Tax Policy Center.

There are lots of changes to the tax code that will cause a boom in aggressive tax planning. Some of these are deliberate, others clearly accidental.

Among the intentional changes, for example, are new rates and rules for pass-through businesses. These would create an entirely new, parallel system of taxation.

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.

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.

Hastily written bill

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. It will lead more businesses to make decisions based not on market demand, but where the biggest loopholes are.

The haste with which this bill was 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.