Tax Cuts and Jobs Act Features Potential Oversight
Several glaringaltic GOP tax bill mistakes will undo some of the proposed promises that the bill included, like lowering the corporate tax rate. The Republican tax bill was meant to lower taxes across the board for all Americans, as well as decrease the corporate tax rate from 35% to 20%, the idea being that the boost to the private sector will lead to increased job creation and economic growth. The Tax Cuts and Jobs Act, however, may actually end up making very little difference to corporations due to an oversight of the alternative minimum tax (AMT), which we’ll examine below. The Republican tax bill is being roundly criticized for having sped through both the House and Senate on its way to becoming law, leaving it with many glitches and oversights that may reduce its effectiveness.
Of the GOP tax bill mistakes, several stand out as being particularly egregious. One problem concerns “pass-through” businesses, which allows individuals to be taxed at the corporate rate versus what their rate would either be. This will allow high-worth business owners to game the system and avoid fair taxes. Someone making $500,000, for instance, could redefine their revenue as pass-through, allowing a 23% deduction. That would save them a total of $30,000.
Other concerns are the AMT and university endowment tax regulations that are poorly communicated. College and university endowments are massive stores of wealth that have typically been untouched due to most institutions of higher education maintain nonprofit status.
Many of these problems are being attributed to the GOP’s rush to see the bill pass into law. The House passed its draft of the bill in two weeks flat, from its very first introduction to the final vote. The Senate was no slouch either, passing the plan in three weeks.
While supporters compare it to the speedy process of the Affordable Care Act under the Obama administration, that process took six months to complete.
The Republicans in the House and Senate have initiated the process of a conference committee, which will allow the officials to tackle the multitude of errors. The new compromised bill would have to be approved by the House and Senate.
Preserving AMT Instead of Repealing Could Force Corporations to Lose Out on Tax Breaks
One of the major features of the Senate and House bill was that it would dramatically lower the corporate tax rate, intending to prompt economic growth. But many companies may not be able to take advantage of the corporate tax breaks under the current legislation due to the lack of a GOP AMT repeal.
The AMT is essentially a parallel tax system that features lower rates but also fewer breaks. The AMT already has a corporate tax rate of 20%, but it is rarely applied, with companies often preferring to take advantage of the many tax breaks offered under the tax code that would not apply under the AMT. The AMT was designed to ensure that companies and individuals can’t use legal tax breaks to avoid paying any tax at all. Tax collectors take the AMT and the regular tax system and calculate what is owed, with companies pay whichever is greater.
But with the corporate tax rate being driven down to 20%, many companies may actually owe more under the AMT by a significant amount, which could essentially wipe out many of the savings they were supposed to receive.
Appears corporate AMT provision probably raises >$300B, not $40B JCT estimated under duress Fri night. This means Rs have to take Senate bill to conference and can’t just have House pass it, unless they want to *really* piss off bus community. 1/5
— Lily Batchelder (@lilybatch) December 6, 2017
Obscurity Over Endowment Tax on Universities with Large Financial Holdings
Another one of the GOP tax bill mistakes involves college and university endowments. The Tax Cuts and Jobs Act features an endowment tax that would see private universities with assets of more than $100,000 per student to pay a 1.4% excise tax on their net investment income.
“Universities get massive tax breaks for their massive endowments,” President Donald Trump said last year.
And endowments can be massive. For the fiscal year 2017, endowments gained 11.3% on investments and could be well into the hundreds of millions of dollars.
Harvard University, for instance, has an endowment of $37.1 billion. Yale University has $27.2 billion in its coffers.
The problem, however, is that the tax doesn’t properly define which accounts are susceptible to the tax. Universities can often have thousands of accounts, meaning that trying to find which ones are exempt or not under the new law could be painstaking and involve a lot of lawyers squabbling over this and other GOP tax bill mistakes.
“Holy crap’: Experts find tax plan riddled with glitches,” Politico, December 6, 2017.
“Experts are starting to find massive errors in the GOP tax bill after it went through Congress at lightning speed,” Business Insider, December 6, 2017.
“Passage of Senate Tax Bill Puts R&D Tax Credit in Doubt,” The Wall Street Journal, December 4, 2017.
“Some colleges have billion-dollar endowments – and now the GOP wants to tax them for it,” Business Insider, November 2, 2017.