November 29, 2017
In the bizarre world of Washington economics, where patent monopolies are “free trade” and projections of Social Security shortfalls decades in the future are a “crisis,” it’s perhaps not surprising to see reality turned on its head in the debate over the Republican tax bill. The Washington Post had a major article on Wisconsin senator Ron Johnson’s objections to the tax bill.
According to the article, Johnson’s is objecting because he wants a lower tax rate on income that individuals receive from pass-through corporations. In presenting Johnson’s case, the article gets the issue completely backward by telling readers:
“Johnson wants ‘pass-through’ companies to be treated more like other corporations that are seeing their rates reduced from 35 percent to 20 percent under the GOP legislation.”
Johnson absolutely does not want pass-through corporations to be treated like other corporations. Pass-through corporations by definition pay zero tax. Their profits are passed through to their owner(s), who then pay tax on it as normal income under current law.
Johnson has no interest in seeing the tax rate on pass-through corporations (which enjoy the privilege of limited liability like other corporations) raised to the same levels as other corporations. Instead, Johnson is arguing that individuals who get income from pass-through corporations should pay a lower tax rate than other people. This is an argument about the tax rate individuals face, it has nothing to do with corporate tax rates.
This is also considered textbook bad tax policy, since it means taxing income at different rates, depending on its source. If there is a big difference in the tax rate that people pay on income they get from pass-through corporations, as opposed to say working as a lawyer or doctor, then they have a large incentive to have their income come from a pass-through corporation. As a result, people will be spending lots of money creating pass-through corporations and misrepresenting the source of their income.
This is a great policy if the point is to promote the tax shelter industry, it is terrible policy if the goal is increasing economic growth and a fair tax code.
Comments