NC Budget and Tax Center

Experts conclude: New tax legislation is full of tax games, roadblocks, and glitches

As Congress continues to go against the will of the people by pushing a tax framework that most Americans are not in favor of, it is worth noting that a number of leading tax academics, practitioners, and analysts have issued a 35-page report describing various tax games, roadblocks and glitches in the tax legislation.

According to the report:

“The complex rules proposed in the House and Senate bills will allow new tax games and planning opportunities for well-advised taxpayers, which will result in unanticipated consequences and costs. These costs may not currently be fully reflected in official estimates already showing the bills adding over $1 trillion to the deficit in the coming decade. Other proposed changes will encounter legal roadblocks that will jeopardize critical elements of the legislation. Finally, in other cases, technical glitches in the legislation may improperly and haphazardly penalize or benefit individual and corporate taxpayers.”

The report highlights various problems with the bill in the following areas:

  • Using Corporations as Tax Shelters: If the corporate tax rate is reduced in the absence of effective anti-abuse measures, taxpayers may be able to transform corporations into tax-sheltered savings vehicles through a variety of strategies.
  • Pass-Through Eligibility Games: Taxpayers may be able to circumvent the limitations on eligibility for the special tax treatment of pass-through businesses.
  • Restructuring State and Local Taxes to Maintain Deductibility: The denial of the deduction for state and local taxes will incentivize these jurisdictions to restructure their forms of revenue collection to avoid this change. This could undercut one of the largest revenue raisers in the entire bill.
  • International Games, Roadblocks, and Glitches: The complex rules intended to exempt foreign income of domestic corporations from U.S. taxation present a variety of tax planning and avoidance opportunities.
  • Money Loophole Machines: The variety of tax rates imposed on different forms of business income in different years invite arbitrage strategies, whereby taxpayers can achieve an economic benefit solely based on the timing and assignment of their income and deductions.

The report concludes with a serious warning:

“Further problems with the bills are likely to emerge. These tax games will reduce tax revenues and thereby increase the true cost of the legislation and make the legislation more regressive than it now appears. Furthermore, additional tax complexity will be necessary in order to police the new rules and to prevent these abuses, ensuring that this legislation will move us further away from the goals a simpler, more equitable, and more efficient tax system. Finally, the IRS and Treasury may be overwhelmed in their efforts to police the new and manipulable rules during a period of reduced funding and budgetary constraints.

“We urge the members of the Senate and House to reassess the tax reform process and the resulting legislative proposals, and to undertake a more deliberative approach to far-reaching legislation that will significantly affect our economy and taxpayer behavior.”

Luis A. Toledo is a Public Policy Analyst for the Budget & Tax Center, a project of the North Carolina Justice Center.

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