Same income, but not taxes in GOP plans
Rates vary based on ownership, level of involvement in firm.
In most places, a dollar is a dollar. But in the tax code envisioned by Republicans, the amount you make may be less important than how you make it.
Consider two chefs working side by side for the same catering company, doing the same job, for the same hours and the same money. The only difference is that one is an employee, the other an independent contractor.
Under the Republican plans, one gets a tax break and the other doesn’t.
That’s because for the first time since the United States adopted an income tax, a higher rate would be applied to employee wages and salaries than to income earned by proprietors, partnerships and closely held corporations.
The House and Senate bills vary in detail, but both end up linking tax rates to a whole new set of characteristics, like ownership, level of involvement, organizational structure or even occupation. These rules, mostly untethered from income level, could raise or lower tax bills by hundreds or thousands of dollars for ordinary taxpayers and millions of dollars for the largest eligible businesses.
“We’ve never had a tax system where wage earners were substantially penalized” relative to other types of income earners, said Adam Looney, a senior fellow at the Brookings Institution and a former Treasury Department official.
So a decorator, an artist or a plumber would have a higher tax rate than an owner of a decorating business, an art shop or a plumbing supply store. A corporate accountant could have a higher rate than a partner in an accounting firm. In the House bill, the head of a family business who works 60-hour weeks would have a higher rate than her brother, who gets an equal share of the profits but spends his days playing “Call of Duty.”
The proposals’ impact rises steeply as paychecks grow. High-income earners — roughly the upper 10 percent — who can take advantage of the new distinctions would be rewarded with substantial gains compared with those who can’t.
Supporters argue that the revised tax regime is an attempt to update the code to reflect changes in the economy.
Rather than depend primarily on individual rate cuts to further power the economy, the Republican plans focus on cutting taxes on certain types of business income. The idea is that these businesses will reinvest those higher returns and stimulate growth.
“This is a radically different approach,” said Fred Goldberg, commissioner of internal revenue under President George H.W. Bush.
Corporations and other types of businesses get the biggest cuts. Employees don’t.
“Theoretically, this makes a certain amount of sense in a vacuum,” said Jared Walczak, a senior policy analyst at the conservative Tax Foundation. “It’s just difficult to define what constitutes wage income compared to business income.”
Indeed, economists and tax experts across the political spectrum warn that the proposed system would invite tax avoidance.
The more the tax code distinguishes among types of earnings, personal characteristics or economic activities, the greater the incentive to label income artificially, restructure or switch categories in a hunt for lower rates.
Expect the best-paid dentists to turn into corporations so they can take advantage of the new 20 percent corporate tax rate, instead of having to pay a top marginal rate of nearly 40 percent on some of their income.
Individual income taxes can be deferred on profits left inside a corporation instead of deposited in a personal account.
What’s more, corporations can deduct local and state taxes, which individual filers can’t.