Experts across the political spectrum generally agree that the Republican tax law fell short on eliminating loopholes while creating plenty of new opportunities for gaming the system. Scott Hodge, president of the conservative Tax Foundation, said in December that the "lawyers at the IRS are going to be very busy over the next couple years" as a result of changes to the pass-through tax regulations. Howard Gleckman of the nonpartisan Tax Policy Center said in January that the complexity of the new rules have “set off a frenzy of loophole-seeking” that turns Americans into “a nation of tax shelter hunters,” while the liberal Center on Budget and Policy Priorities said in April that the design of the new tax rules “invites rampant tax sheltering and gaming.”
This week, Alexandra Thornton of the liberal Center for American Progress took aim at what she called the legislation’s “unprecedented opportunities for tax gaming,” highlighting 11 ways that businesses and high-income taxpayers could take advantage of the new tax rules. If these tax avoidance strategies are pursued aggressively, as some experts expect, tax revenues will be even lower than projected, “further threaten funding for infrastructure improvements, education, Medicare, and other federal initiatives that ensure broad participation in the U.S. economy over the long run, as well as economic stability,” Thornton warns.
While the Congressional Budget Office projects a $1.9 trillion loss in revenues over 10 years due to the tax cuts, Thornton argues that initial estimates are often wrong, and typically understate the revenue losses that accumulate as taxpayers learn how to use the new rules, citing C. Eugene Steuerle of the Tax Policy Center, who wrote that federal budget estimates have “a built-in bias towards underestimating their long-term costs.”
Here are a few of the ways that Thornton says “the wealthy and corporations will game the new tax law” in ways that further reduce federal revenues:
- Businesses could break apart to take advantage of the new pass-through deduction, turning internal transfers into external payments that receive a tax break.
- Some partnerships may reduce their taxes by becoming C-corporations. Other analysts have projected a substantial increase in the number of C-corps in the wake of the new tax law; in June, analysts at the Penn Wharton Budget Model predicted a “mass conversion from pass-through entities to C-corporations.”
- U.S. companies may find it advantageous to invest more overseas in order to reduce their domestic tax bills.
For the full list and analysis, complete with extensive footnotes, see Thornton’s piece at the Center for American Progress.