The Loopholes and Glitches of the Tax Bill
A number of tax scholars have compiled studies and completed a report that details the glitches and loopholes of the new tax bills that Congress chose to close. There are numerous issues that come with it. In a nutshell, these problems will cost the government more money than predicted because taxpayers shield their money in various ways. However, there are still some tax increases that are unintended as this is happening.
Some of the glitches
The current tax system does not have enough to address the scenario where corporations are given lower tax rates than individuals. The new rate for corporations is also significantly below the individual rate. Therefore, the corporate income is double-taxed at the corporate level and then the rate that the shareholders obtain per capital or dividend. That second aspect of taxes can be avoided and is mitigable in many ways. This results in the taxpayer gaining from the investment of the corporation because it accrues at the corporate rate’s lower level. By simply setting the corporation (this is done by checking the box so that partnership and other entities can be treated mainly as a corporation for the sole purpose of paying taxes), their income is accrued and is in the form of profits for the corporation. As for the shareholder and the employees, their wages are reduced so this increased the retained profits of the corporation.
The Senate is trying to go around the tax advantage for the pass-through businesses. These are the businesses that earn their profits and are then passed to their owners because these are taxed in the form of an individual income tax. If this is the case, then the law firm associates can eventually become partners because there is a separate partnership that has to be paid, as long as it is provided by the original firm. The self-employed might also mischaracterize the relationships by rearranging this with the independent contractors, instead of concentrating on the employees.
Meanwhile, the provision of the House encourages the owners to reduce how much they are involved in their companies because its main target is toward the passive owners. In this way, they can acquire the capital from the firm, even if they don’t really need this. An example of this is when doctors or lawyers buy buildings where they work.
Both of these bills limit the deductibility of the local and the state taxes which pretty much raises a ton of money. In response to this, the states also shift the revenue efforts of these sources, and this will also be deductible. These bills then allow the property tax deduction of around $10,000. States that are set to come up with policies that are deemed as “circuit breakers” allow the taxpayers to pay lower than what they are supposed to in income taxes, but they will be paying more for the property taxes. They could also get the taxed income through the payroll taxes on these employers which remain deductible. Since the charitable deduction stays, there are states that even let the residents provide to the public coffers and consider this as something that goes against their state tax.
The technical aspects of the corporate reforms can also encourage the companies to locate the investment offshore as well as the real assets. They can also violate the treaty commitments.
There are also a number of provisions that can create opportunities for tax arbitrage. This is when the deductions are taken alongside the high tax rates resulting in a low generated income rate. When the corporate rate is delayed until 2019, then the business is allowed to fully deduct the purchases for equipment instantaneously. This also encourages a number of investments in 2018. Companies are encouraged to buy equipment this year and then deduct this alongside the 35% tax rate. Then it is a good strategy to just sell this again in the following year. This is because the tax rate will be 20%.
A glitch in this tax that has been overhauled by Republicans can create an uncertain future for most companies and its operations. This legislation costs $1.5 trillion and changes the way that taxpayers file their federal income taxes. Millions of Americans are ecstatic about the fact that this does lower their taxes, but it comes with a price.
This new bill is scrutinized because it has a potential impact on the budget of various states. Officials are slowly yet surely recognizing that the federal legislation has enormous and vast influence and effect on the state taxes that make it a central issue.
Tax experts analyzed the whole bull and there are people who will be negatively impacted by this. There are things that can be done at the state level, but it would still mitigate problems.
Not to mention the fact that the Republicans have moved the bill so fast in order for the President to meet the Christmas deadline that was given to him. This resulted in the GOP leaders abruptly announcing and pushing back their schedules one day after the Senate has ruled the three provisions. This violates the chamber rules.
This decision also forces the highly unusual second vote of the House and this had already been approved 227-203.
This is a major overhaul on the tax code. The rules also glitch and it appears unlikely that this will have an impact on the vote totals. This also lowers the individual income tax rates for the filers and then double the standard deduction. For married couples, this can amount to $24,000. This also limits the popular deductions like those for the interest on the mortgage set alongside the local and the state taxes. There is then provision that is claimed by the higher share of taxpayers who earn more than average because they file this in another state.
The bill then lowers the corporate rates that start from 35% to 21%. It then creates a deduction of 20% for the pass-through businesses where the owner can report the business income on the personal return.
Taxpaying individuals will eventually receive cuts of around 12%. This means that with the iteration on the bill, the tax cut would now be $1,000 as opposed to $2,530.
The reverberations of the tax changes are created in order to meet the budget goals for the next year. The consensus that the federal tax proposal has a significant influence and impact as well as the said adjustments to each state law. There should become positive responses to the changes. By taking a conservative approach despite these murky forecasts, then the spending committee can also vote unanimously when setting the goal to reduce the state to $298 million in the form of projected revenue. The gap of the zero in the said budget takes place on July 1.
There is also the bait and the switch especially for those who are looking into the interesting loophole. This then lowers the rate on the percentage of the firm’s profits and their clients also pay on the investments. This extends the holding period from a year to a maximum of three years. It is also important to note that the provision does not apply to the corporations that hold the interest and carry this over. The fund manager can then collect the carried interest in the form of a corporation that also does not pay taxes.
The House bill also lets the heirs sell their assets and not pay the income tax. Therefore, a family who gets a fortune from a long-held asset may never have to pay the taxes because of the bulk of the overall wealth that it accumulates. The generation that has found this can borrow against the stock so that it can meet the expenses along with the next generation and sell it without the income tax. The last time that the estate tax has been repealed was way back in 2010. This is because Congress has changed the rules regarding the inherited assets so that what was previously mentioned can be avoided. Clients are then advised about the tax implications on their investments.
The measure is very beneficial to wealthy clients. It is a total scam on the part of the lawmakers. It is the matter of the tax policy to appear completely indefensible. It also permits the income in the constitutional sense that is entirely untaxed.
The Unusual Trend of the New Bill
There is an unusual trend in corporate America along with the finance industry. Despite the 2012 formation of the campaign that was previously called “Fix the Debt”, private equity execs, CEOs and hedge fund managers of the five biggest banks in the United States were given the prospect an opportunity to pay fewer taxes. This led to the parties not really caring about the tax plan that Trump presented despite it coming up with a deficit explosion.
There have been some conclusions that the country and a number of businesses will most likely do better if the balance sheet of the nation is not overcome with debt. Revenue is generated from the taxes and a part of it has to deal with costs for entitlements and healthcare. This tax overhaul is not tackled as much as it should in the new bill. In the meantime, it would also be nice to witness chief executives articulate this very message, especially when they were so vocal about the topic years ago. When they spoke of the importance of the long-term economic health of the United States and its assurance, taxpayers are actually being lectured that the country is getting fooled.
This new bill is the very sales tax pitch that the Republican Party has been dreaming of getting into fruition the very minute that they started the tax reform. The whole idea really was to make this fair, simple and easy to understand, but that is not the case. Now, the Senate and the House have already hashed out a compromise bill.
It is important to mention that this bill was drafted with so much incredible speed that there was not even any public debate or hearings. This makes the tax bill a complete mess filled with glitches and containing opaque wording with so many complications that there is so much room to debate. Despite the rapid-fire pace of the bill, this group of tax experts presented the glitches and also conducted a survey on whether or not this tax code is efficient and even worth complying with.
A number of analysts believe that there was no need for changes because this will only cause more problems. For one, not only with this tax bill increase the opportunities for the wealthy to be more connected to the leeways of tax code, but they also have higher chances to avoid paying the fair share. This would likely make other people pay for the difference that they themselves should hand in.
The GOP bill encourages more tax shenanigans
This tax code has various ways for rich people to lower their tax rates because they can now classify themselves as a corporation. An individual taxpayer can then incorporate herself and come into some kind of contract with the new corporation which then results in a higher paycheck because there is less tax. Shareholders of the corporation can also run and then they can just pay the manager’s salary and then make up for the difference from the payout of the shareholder. This then pays for the corporate tax as well as the capital gains as opposed to the individual income tax.
This can only be worth it if individuals can afford to hire lawyers and accountants. IN doing so, then they can get a lower effective tax rate. The truth of the matter is, the corporate rate is at 35% and the highest individual rate is 39.6%. This only makes sense for those who understand it. In layman’s terms, these two rates are now further apart and there are more instances for these shady games to be played.
Want To Learn More About Tax Reform – Join Us in our next Seminar