Like the historic Tax Reform Act of
1986, the current proposed Tax Cuts and Jobs Act is a mixed bag.
There is simplification. Less rates, less deductions and credits, no
more Pease phase-out of the remaining itemized deductions, and the repeal of
the dreaded Alternative Minimum Tax.
But there is new complexity. The ridiculous special tax treatment of
“pass-through” business income, apparently including sole proprietorships
reported on Schedule C, is truly a convoluted
mucking fess. It looks like the
computation of pass-through business income will be a nightmare for tax professionals – fortunately, based on my
clients, not for me, but definitely for my colleagues.
If we want parity for the tax treatment
of pass-through entities here is what I think should happen.
Taxation of pass-through income from
Schedule C sole proprietorships should remain the same as current law – taxed
as ordinary income subject to SE tax.
Pass through business income of the
“general partners” of a partnership, the equivalent of Schedule C sole
proprietors, should also not change – it is taxed as ordinary income subject to
SE tax. Pass through business income of
the “limited partners” of a partnership is basically the equivalent of
corporate dividends, and should be taxed as such.
Pass through business income of a
shareholder in a sub-S corporation is also basically the equivalent of
corporate dividends, and should be taxed as such.
The Act maintains the current special
tax rates for qualified dividends and long-term capital gains (it also
maintains the NIIT and .9% Medicare “Obamacare” surtaxes). But it appears it also maintains the tax
brackets for these rates the same as under current law, and does not just apply
the rates directly to the new tax rate brackets – so there will actually be two
sets of tax rate brackets.
There are some weird items in the
proposal. Taxpayers would be able to contribute
to a 529 Education Saving Plan on behalf
of an unborn child - described as “a
member of the species homo sapiens, at any stage of development, who is carried
in the womb”. And churches would be
allowed to make political statements, and pastors endorse specific political
candidates from the pulpit, without losing tax-exempt status. Just one more example of the Republican Party
pitiful pandering, erroneously and certainly contrary to traditional
conservative philosophy, to the “religious right”.
In my opinion, from a tax policy point
of view, some of what is wrong with the Act, based on my Principles of Tax
Reform (click here) is –
It continues to use the Tax Code to
distribute federal social welfare and other tax benefits – the Earned Income
Tax Credit and the education benefits for example.
It continues to provide refundable
credits, which are a magnet for tax fraud.
It continues to phase-out tax
deductions and credits based on an AGI income threshold.
I expect the above will NEVER be
changed, and the Tax Code will ALWAYS be used, erroneously and inappropriately,
to distribute government benefits and provide refundable credits and a
“back-door” progressive tax rate increase without the honesty of actually
increasing tax rates. But I can dream,
can’t I.
Your thoughts?
TTFN
1 comment:
Here is what bothers me about current tax code. It is too oriented towards affecting behaviors and less towards revenue for the fisc. First, why would anyone think it would be a good idea for the government to influence citizen behaviors? Second, why would anyone think it would be a good idea for the government to pay citizens for certain government sanctioned behaviors? Third, why would anyone think it would be a good idea for government to borrow money for said payments? Fourth, while citizens pay less tax for adhering to certain behaviors their savings end up in the pockets of charities/churches (I thought government was supposed to be separate from religion), home mortgage lenders, medical care providers, state and local government entities, and educational institutions. Fifth, this, in turn, influences the pricing behaviors of said medical providers, lenders, governments, and educational institutions.
To illustrate. I give $10,000 to my home mortgage lender, medical care provider, various state and local government entities, and educational institution. My overall tax bill is $2,000 but because I can deduct the $10,000 I only pay $1,500. In other words the government said to me, you pay these entities $9,500 and we, the government will pay them the other $500.
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