Gaming The Tax Code
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The House and Senate have approved bills that would overhaul the nation's tax code and spent this week trying to patch those bills together. The legislation promises to be enormously complicated. Some tax experts say it presents huge opportunities to game the tax system. NPR's Jim Zarroli reports.
JIM ZARROLI, BYLINE: All over the country, business owners are trying to figure out what the Republican tax overhaul means for them - people such as Emily Kerkstra (ph), who has a cafe and coffee shop in Oregon.
EMILY KERKSTRA: As far as I know, like, there's two different bills. Nothing's been settled. Nothing's been passed. And the information just isn't out there.
ZARROLI: Kerkstra wants to know whether she'll be able to deduct expenses.
KERKSTRA: Last year, I bought a computer for my business. And now I'm hearing that if I needed to replace that computer, that would have to come straight out of my personal pocket, and I couldn't run it through my business.
ZARROLI: The questions are arising because of the sheer scope of the tax bills. Jonathan Traub is managing principal at Deloitte Tax.
JONATHAN TRAUB: What's going on here is an attempt to essentially rewrite the entire tax code in a space of about two months from the time we first saw the bill to the time it will get to the president's desk.
ZARROLI: And the vastness of the bills has created lots of opportunities for gaming the tax code, says NYU Law School professor David Kamin. For instance there's a much lower tax rate for so-called pass-through entities, which include a lot of small business owners like doctors, architects and consultants. Kamin says the lower rates will tempt people who now earn a salary to incorporate as businesses.
DAVID KAMIN: You can see immediately in the Senate bill a pretty big hole so that, potentially, many people would just be able to turn themselves into pass-throughs and get the lower rate.
ZARROLI: Kamin says the same thing happened in Kansas. The state cut business taxes so sharply, it led to huge budget problems. And Kansas later had to backtrack and reverse some of those cuts. The bills passed by Congress contain other potential loopholes, as well. The Senate bill allows a partial deduction of property taxes but not state income taxes, which means states over time may lower their income taxes and raise more money through property taxes.
KAMIN: There are hundreds of billions of dollars on the table over a decade. States and localities are going to have a lot of incentive to try to figure out ways to preserve tax deductibility.
ZARROLI: Kamin says the legislation includes stopgap measures to prevent abuses, but a good lawyer can get around them. In fact, Kamin says the tax overhaul is a kind of full employment act for lawyers and accountants. And he says if enough people pay less taxes, the federal debt will get that much bigger.
KAMIN: I am deeply concerned that the current estimates are not reflecting the kinds of games that will be played and will undercut federal revenues and lead to unfair windfalls, potentially, throughout the system.
ZARROLI: There's nothing new about people gaming the tax code. They always have. But the scope of Congress's effort and the speed with which it's being carried out mean that there will be plenty of unintended consequences. And a lot of lawyers will be looking for ways to take advantage of them. Jim Zarroli, NPR News, New York.
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