Panel has not had ad­e­quate time to an­a­lyze im­pact of pro­pos­als

The Buffalo News - - BUSI­NESS NEWS -

ven­tures would be cre­ated by the com­bi­na­tion of a new pro­posal to im­me­di­ately ex­pense in­vest­ments with the Se­nate’s sug­gested de­lay in the cor­po­rate tax cut.

• Rules de­signed to pre­vent highly paid doc­tors, lawyers and other ser­vice providers from cash­ing in on new ben­e­fits aimed at small busi­nesses can be eas­ily cir­cum­vented.

Even those who ap­plaud the aim of re­duc­ing cor­po­rate taxes and trans­form­ing how global prof­its are taxed worry that spe­cific pro­vi­sions will miss the mark.

Re­pub­li­can lead­ers, re­spond­ing to pres­sure to move quickly, de­fend the process, say­ing Congress has held dozens of hear­ings on tax re­form in re­cent years.

Tax bills, by na­ture com­plex, are shaped by com­pet­ing pres­sures. And with­hold­ing de­tails un­til the fi­nal vote as a way of shield­ing the leg­is­la­tion from spe­cial in­ter­ests is not a new strat­egy.

Yet sev­eral vet­er­ans of pre­vi­ous tax bat­tles ar­gue what is dif­fer­ent this time is the mix of break­neck speed and enor­mous scope.

The Con­gres­sional Bud­get Of­fice said on Mon­day that Congress’ non­par­ti­san Joint Com­mit­tee on Tax­a­tion has not yet had enough time to an­a­lyze the full eco­nomic im­pact of the pro­pos­als.

One of the plan’s most rad­i­cal changes is a shift from a world­wide sys­tem, where prof­its are taxed no mat­ter where they are earned, to a ter­ri­to­rial sys­tem, which ex­empts prof­its earned out­side the United States. That would bring the U.S. sys­tem in line with those in most other na­tions.

Be­cause the switch could end up en­cour­ag­ing U.S. com­pa­nies to move even more prof­its off­shore to avoid pay­ing any do­mes­tic in­come tax, both the House and Se­nate ver­sions of the bill im­pose rules to de­ter most multi­na­tion­als with an­nual rev­enues of more than $100 mil­lion from ex­ploit­ing such tac­tics.

But the ef­fort to catch the giants un­der the new ter­ri­to­rial sys­tem sets a fi­nan­cial bar that small and medium-size busi­nesses can limbo un­der. Shay said ac­count­ing firms were likely to start mar­ket­ing off-the-shelf tax shel­ters al­low­ing com­pa­nies to set up for­eign of­fices in low­tax coun­tries like Ber­muda or Lux­em­bourg to shrink their tax bills.

“They’re just open­ing us up to the next round of tax shel­ters on the in­ter­na­tional side,” he said. “And the IRS, un­der­funded as it is, isn’t go­ing to be able to check any­thing.”

At the same time, he said, some safe­guards aimed at multi­na­tion­als could still be by­passed. To re­duce their home tax bill, com­pa­nies like Google and Pfizer, for in­stance, of­ten re­lo­cate patents and copy­rights in tax havens and then sell use of that in­tel­lec­tual prop­erty back to their U.S. sub­sidiaries at steep prices. These are the higher-than-nor­mal prof­its – which Se­nate bill drafters have called “GILTI” (for global in­tan­gi­ble low-tax in­come) – that Re­pub­li­can bills are try­ing to stop from leak­ing out of the tax sys­tem.

Multi­na­tion­als, though, could avoid some of the GILTI tax by shift­ing pro­duc­tion and re­search fa­cil­i­ties abroad.

Other prob­lems arise from the push to re­duce the rate on pass-through busi­nesses (sole pro­pri­etor­ships, part­ner­ships and S cor­po­ra­tions that cur­rently pay taxes at the in­di­vid­ual rate). Law­mak­ers have ad­ver­tised the cut as relief for smaller busi­nesses, but high-in­come in­vestors in hedge and pri­vate-eq­uity funds could use the pro­vi­sion to re­duce the tax paid on rent and in­ter­est in­come by as much as a third.

Hedge-fund in­vestors have an ad­di­tional op­por­tu­nity for a wind­fall with a sim­ple re­port­ing tech­nique, said Steven M. Rosen­thal, a se­nior fel­low at the non­par­ti­san Tax Pol­icy Cen­ter and for­mer leg­is­la­tion coun­sel with the Joint Com­mit­tee on Tax­a­tion. The funds’ de­ci­sion to mark their trad­ing po­si­tions at their mar­ket price (in­stead of their ini­tial pur­chase price) would en­able any gains to qual­ify for pass-through treat­ment at the re­duced rate of 25 per­cent in­stead of be­ing treated as short-term cap­i­tal gains, at a top rate that nears 40 per­cent.

The pass-through changes present other tax dodges. Ben­e­fits for pass-throughs that pro­vide ser­vices – like doc­tors, lawyers and ac­coun­tants – are sup­posed to be phased out for in­di­vid­u­als with in­comes above $75,000 and for mar­ried cou­ples with in­come above $150,000. But a firm could skirt that limit by cre­at­ing mul­ti­ple part­ner­ships with dif­fer­ent func­tions, with one pro­vid­ing ser­vices and an­other han­dling, say, li­cens­ing or leas­ing, said Dan Shaviro, a pro­fes­sor of tax­a­tion at New York Uni­ver­sity Law School who helped write the 1986 tax over­haul.

“There is not a sin­gle ad­van­tage this has, ex­cept for stu­dents of peo­ple like me, who will get paid more to fig­ure out how to game the sys­tem,” he said.

In­di­vid­ual pro­pos­als that might make sense on their own can also set off un­in­tended con­se­quences when paired to­gether. Although the Se­nate’s plan to wait un­til 2019 to cut the cor­po­rate tax rate to 20 per­cent from 35 per­cent has in­fu­ri­ated some share­hold­ers, it saves money so that Congress can reach its bud­get goals. Some tax ex­perts go fur­ther and ar­gue that any cut should be phased in over a 10-year pe­riod to smooth out in­vest­ment and re­duce wind­fall gains.

Yet en­act­ing a 20 per­cent cor­po­rate tax rate to take ef­fect one year in ad­vance while al­low­ing in­vestors to im­me­di­ately deduct their ex­penses at 35 per­cent op­er­ates like a sub­sidy, and could en­cour­age in­vest­ing in money-los­ing projects sim­ply for a tax gain.

“That could lead to silly stuff where you have a loss be­fore the tax, but a gain af­ter the tax,” Shaviro said.

The short­com­ings are fix­able to some de­gree, crit­ics say, but the Re­pub­li­can strat­egy of push­ing through a bill with­out Demo­cratic votes be­fore the end of the year – on tax rules that take ef­fect a few weeks later – will not leave suf­fi­cient time.

To some sup­port­ers, though, that’s the price of suc­cess.

“Will they find things that need to be fixed af­ter­ward be­cause the process was mov­ing so fast? Yes,” said Rachelle Bern­stein, vice pres­i­dent and tax coun­sel at the Na­tional Re­tail Fed­er­a­tion, which rep­re­sents big chains like Macy’s and Saks Fifth Av­enue.

But there are al­ways tech­ni­cal cor­rec­tions to tax bills af­ter they pass, Bern­stein said, and re­tail­ers have been wait­ing so long for a cor­po­rate rate cut that they don’t mind if it fi­nally hap­pens with an im­per­fect bill.

“It’s part of how the sausage is made, but it’s bet­ter to make this sausage than cut it off,” Bern­stein said.

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