The legislative process has been likened to sausage making. Sausage doesn’t get more appetizing if you keep looking at it closely over a period of weeks, and neither does the Camp “tax reform” plan. Andrew Lundeen and Kyle Pomerleau at the Tax Policy Blog today highlight some gristly features of the grand effort by the head GOP taxwriter:
The proposal leaves in place high tax rates for many S corporations, subjects them to additional payroll taxes, creates new distortions between types of industries, and produces two tax rate bubbles.
They note these major S corporation changes:
Creates Different Tax Treatment for Manufacturing and Non-Manufacturing Industries
Camp’s tax reform package introduces complication with a new 10 percent surtax for non-manufacturing income. To make things more complicated, the additional 10 percent surtax would be calculated on a different income scale: modified adjusted gross income or MAGI. This essentially creates two side by side tax codes, a la the AMT, and individuals and businesses would have to calculate their AGI for one and their MAGI for the other.
As I noted, it doesn’t simplify the code by getting rid of the economically foolish Section 199 production deduction; it just moves it to a different section.
The Difference between Active and Passive Shareholders
The difference between active and passive shareholders is important for determining the marginal tax rates for S corporations under Chairman Camp’s plan.
That’s true now, but you’d expect a “reform” plan to get rid of this sort of gratuitous and difficult-to-enforce difference.
Changes to Self-Employment Taxes: the 70/30 Split Rule for SECA Taxes
Under current law, the IRS requires business owners to pay themselves a reasonable wage in order to prevent people from gaming this income distinction in order to avoid the extra 15.3 percent payroll tax hit.
Camp’s plan would replace the current reasonable wage standard with a 70/30 split, changing the rules for active shareholders. The rule would require that active shareholders of S corporations report 70 percent of their total earning as wage income.
I think it’s just one step on the way to a 100/0 split.
Tax Rate Bubble
Another element of Camp’s tax plan is the creation marginal tax rate bubbles. This occurs when a marginal tax rate, for example, goes from 10 percent to 15 percent and back down to 10 percent. We have a post that discusses the marginal tax rates under Camp’s plan, which you can find here.
When a “reform” plan comes with so many phase-outs and distortions, it’s not actually reforming anything. I think the Camp plan will come to be seen as a false move and a lost opportunity.
TaxProf, The IRS Scandal, Day 316
William Perez, Average Sales Tax Rates by State: 2014, highlighting a Tax Policy Blog analysis.
Annette Nellen, Revenues versus tax collections. “A recent blog post on LinkedIn’s Sales and Use Tax Legislative Updates included a comment from B.J. Pritchett suggesting that what governments collect in taxes should not be called “revenues” because it is not from selling goods and services.”
Tax Justice Blog, State News Quick Hits: Don’t Expect Much from Congress. Always a good idea.
Kay Bell, Senate Finance plans tax extenders vote for week of March 31. She links to an article quoting a Senate Finance spokeswoman as saying “No decisions have been made on the content of the measure or the timing for a committee session and vote.”
Howard Gleckman, Fiscal Reality Check: Will Congress Pay for the Tax Extenders and the Doc Fix? Extenders themselves are a scam. Congress passes them over and over a year at a time so they can pretend that they cost less than they do — funky accounting that would get a public company CFO jail time, but standard procedure in Congress.
A new Cavalcade of Risk is up at Insurance Regulatory Law. The Cavalcade is a venerable roundup of insurance and risk-management posts. Hank Stern’s contribution, an interview with Neal Halder of Principal Financial Group about their “accelerated underwriting” process for life insurance, is a great read.
Jason Dinesen, Fair Warning: More Baseball Posts to Pop Up this Year. That’s a good thing.
Think he reported this income? Man With Deep Pockets Busted Stealing a Lot of Laundry Money (Going Concern):
Just how many loads of laundry could one do with $460,000 in stolen quarters?
That’s probably not the question asked by public works inspector Thomas Rica, who pleaded guilty this week to stealing that much in quarters from the meter collection room of the New Jersey town for which he worked.
At the laundromats I used back in school, that would have been nearly enough quarters to get your clothes dry.
Tags: tax reform, cavalcade of risk, TaxProf, Kay Bell, William Perez, TaxGrrrl, Going Concern, Howard Gleckman, Hank Stern, Jack Townsend, Jason Dinesen, Andrew Lundeen, Kyle Pomerleau, Tax Justice Blog, Annette Nellen, Camp plan