Senate Tax Debacle: Certain Pass-Through Entities Face Marginal Tax Rates Over 100% Under Current Bill

As the House and Senate continue to try to reconcile their two versions of a tax plan, the taxing structure for pass-through entities (s-corps, LLC's, etc.) continues to be somewhat controversial, if not completely nonsensical. As we pointed out last week, the Senate bill somewhat randomly chose to exclude pass-through entities organized as family trusts from tax cuts which would ultimately leave them on the hook for much larger tax bills due to the elimination of other deductions. It's unclear whether this bizarre exclusion was just an oversight or an intentional political hit on an easy target that no one in Washington DC would dare defend publicly: rich families organized as trusts.

Now, a new note from the Tax Policy Center lays out some scenarios whereby the marginal tax rate for high-income pass-through entities could soar to over 100%.  Of course, while two rational people can debate the impact of a ~40% tax rate on a person's desire to work, we're almost certain that a taxing structure that takes more than 100% of your marginal income will be a slight disincentive.  Here's an example of how it works from the Wall Street Journal:

Consider, for example, a married, self-employed New Jersey lawyer with three children and earnings of about $615,000. Getting $100 more in business income would force the lawyer to pay $105.45 in federal and state taxes, according to calculations by the conservative-leaning Tax Foundation. That is more than double the marginal tax rate that household faces today.

 

If the New Jersey lawyer’s stay-at-home spouse wanted a job, the first $100 of the spouse’s wages would require $107.79 in taxes. And the tax rates for similarly situated residents of California and New York City would be even higher, the Tax Foundation found. Analyses by the Tax Policy Center, which is run by a former Obama administration official, find similar results, with federal marginal rates as high as 85%, and those don’t include items such as state taxes, self-employment taxes or the phase-out of child tax credits.

As Joseph Rosenberg of the Tax Policy Center notes, the penalty is greatest for high-income pass-through entities in highly taxed states. 

Consider the example of a married couple whose entire income is “specified service” income generated by a pass-through entity and who claims the standard deduction. At an income of $524,000, the couple could take an $87,000 deduction (17.4% of the couple’s taxable income “without regard” to the deduction) that would reduce their taxes by $30,450 (since they are in the 35% tax bracket), but the deduction is entirely phased out at an income of $624,000. On average, that amounts to more than a 30% surtax on top of the 35% statutory tax rate over that range of income.

 

The actual phase-out is much more complicated, as the bill’s text released Monday night makes clear, because the deduction continues to apply even as its benefit is phased out. (If that sounds convoluted, it’s because it is.) The couple’s marginal income tax rate would jump to 61.375% at $528,541 of income. And it would rise to 73% until their income reaches $624,000 and the deduction is fully phased-out, at which point their marginal tax rate would return to the 35 percent ordinary income tax rate. (Note that these calculations do not include the additional 3.8 percent in self-employment payroll tax or the net investment income tax).

Here is how the overall tax rate schedule for pass-through income would look:

“This is a big concern,” said Scott Greenberg, a Tax Foundation analyst. “It would be unfortunate if Congress passed a tax bill that had the effect of making additional work and additional income not worthwhile for any subgroup of households.”

Of course, in the end, this type of taxing structure just raises the returns on "gaming" the tax system in every way possible.  “I would expect a huge tax-gaming response once people fully understand how it works,” said Mr. Gamage, a former Treasury Department official, who said business owners have an easier time engaging in such tax avoidance than salaried employees do. “The payoff for gaming is huge, within the set of people who both face these rates and have flexible enough business structures.”

Not surprisingly, lawmakers are looking at changes to prevent this debacle from happening as they attempt to reconcile Senate and House versions of the tax bill this week. The formal House-Senate conference committee will meet on Wednesday, and GOP lawmakers have said they may unveil an agreement by week’s end...though they seem to consistently miss their own self-imposed deadlines.

But you shouldn't worry about these issues too much as a spokeswoman for the Senate Finance Committee assured the Journal that as "with any major reform, there will always be unusual hypotheticals delivering anomalous results...The goal of Congress’s tax overhaul has been to lower taxes on the American people and by and large, according to a variety of analyses, we’re achieving that."

Comments

Sudden Debt Bes Mon, 12/11/2017 - 12:00 Permalink

America wasn't founded for the little man. In America you have the rich who matter and who go into historyand you have the rest who serve them and who worship the rich as gods. America is the only country on earth where the citizens dream of killing their fellow citizens because it would be cool.you simply can't explain the walking death cult you have where you kill you're neighbours because "they're out to get you"That's actually a pretty fucked up thing you know. In America, 72% of all grownup people hope their parents die fast so they'll get their money.... I can assure you, that is unbelievable for the rest of the world.  In America, people elect politicians who are rich because they are rich and who will only serve the rich. And you do it with a conviction that amazes the rest of the world.American elections are comedy shows for the rest of the world. You guys love to make a joke of yourselfs and over here you'll always hear the same: "let's hope it never gets as bad over here as in America" 

In reply to by Bes

shankster synergize Mon, 12/11/2017 - 10:33 Permalink

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“Whoever controls the volume of money in any country is absolute master of all industry and commerce.”  President James Garfield

In reply to by synergize

chestergimli shankster Mon, 12/11/2017 - 11:17 Permalink

This is one of the main reasons why I have said that any and all monetary systems must be destroyed and in addition, the numerical value of anything.

This is what the Apocalypse means when it says that there will be a new heaven and a new earth and that all tears will be wiped from our eyes. The destruction of any and all monetary systems in addition to the numerical value of anything will inaugurate this. Then the mountains shall be leveled and the valleys shall be raised. In other words, everyone will be more or less the same.

In reply to by shankster

LoneStarHog GlassHouse101 Mon, 12/11/2017 - 10:25 Permalink

I believe that the Globalists - used generically - are behind the cryptocurrencies and Blockchain, as I believe that this 1988 stealth announcement is proof.  Released exactly TWENTY years prior to the announcement of Blockchain in 2008; which is exactly TEN years prior to The Economist's 2018. (The numbers Ten and Twenty have always had mystic meanings through numerous civilizations). The contention has always been stated by many knowledgeable people that THEY always let you know WHAT they are planning; albeit in some abstract form.  Maybe a sadistic game of Cat & Mouse, Wack-a-Mole, Cups/Shells & Pea?It is my contention that the Economist in 1988 (i.e. TPTB) announced a gold-backed cryptocurrency for 2018. Look at the cover and what I believe people are missing:     1) The coin is gold, and arguably depicts a cryptocurrency.     2) It is stealthy with the presentation of TEN.  According to Agrippa, "ten is called the number of all or universal, and the complete number marking the full course of life." Also he attributes to it a sense of totality, the achievement, the return to the unit after the development of the cycle of the first nine numbers. (i.e the Globalists FINAL solution and the return to GOLD).     3) The Ten is the stealth presentation of 1 & 0 which actually represent binary (i.e. digital).     4) The circle with a line through it is a double entente. It is an abstraction of the Greek Phi (The Golden Ratio - pervasive throughout Nature - symbol of universal harmony, creativity and balance); also Global and Internet.     5) The Phoenix - also gold - actually depicts the RISE from the ashes of GOLD, in the form of a gold-backed cryptocurrency. The purpose of announcing the Blockchain and first cryptocurrency in 2008/2009 was to conduct a REAL-TIME TEST of the Blockchain and public acceptance, providing a TEN year window of testing; all while herding the public for slaughter. In my opinion, when TPTB announce the gold-backed Crypto, it will DESTROY all FIAT Cryptos by possibly making them illegal. They are drawing fiat dollars from gold and silver in just another scam, allowing them to continue manipulating a low price while accruing physical metals.In my opinion, this is PROOF that THEY are behind the Blockchain and Bitcoin, et al. One also has to ask about the other phantom abstraction:  Satoshi Nakamoto.

In reply to by GlassHouse101

Countrybunkererd JustPrintMoreDuh Mon, 12/11/2017 - 10:25 Permalink

Incentive to work.  Consider a self employed individual (and a family of 4) with income of say 55K and 20K in health insurance who works 60 hours a week.  If he chose to work 35 hours a week and cut the income to say 40K, he would get a huge subsidy to the health insurance and make up the 20K by working about half as much.  The numbers are estimates, each state is different, but the underlying issue is very real.Government doing what it does best...destruction.

In reply to by JustPrintMoreDuh

Endgame Napoleon Countrybunkererd Mon, 12/11/2017 - 12:11 Permalink

Consider an [individual] with no womb productivity, working full time to reach the [$18,093] per capita income in the state of KY. The max child tax credit for 2017 is $6,318, which is 1/3rd of the childless individual’s yearly wages in many full-time jobs in many states, not just KY.

They have raised the child tax credit again, taking the maximum, tax-time payout for womb productivity to $6,444 for 2018.

https://en.m.wikipedia.org/wiki/List_of_Kentucky_locations_by_per_capit…

https://www.irs.gov/credits-deductions/individuals/earned-income-tax-cr…

There is a LOT less pay out for work productivity.

The individual with no kids cannot afford rent; it absorbs more than half of his/her $18k pay. But unlike the mom working part time to stay below the income limit for welfare and pumping out kids out of wedlock, the childless individual does not qualify for the free rent, free groceries and monthly cash assistance enjoyed by the child-tax-credit recipients.

S/he cannot even afford rent.

What is the incentive to work?

Many aren’t. Historic numbers. And it will continue.

https://en.m.wikipedia.org/wiki/List_of_Kentucky_locations_by_per_capit…

Consider the same [individual], driven into 1099 self-employment due to the wide range of jobs dominated by frequently absentee, [childbearing-age] moms and moms working part time to stay below the income limit for monthly welfare and the [phase outs] for the child-tax-credit welfare.

The self-employed individual contractors do not get welfare or tax welfare, AND they pay [twice as much] SS tax — 15.3%, not 7.65%, like the part-time-worker moms who get welfare and tax welfare.

This includes a lot of male Trump voters and quite a few females who are either 1) among the 28% of childless people over 40 or 2) older moms with grown children who no longer get pay-per-birth billpay and who are increasingly single. Many young women work the fun-employment retail jobs that also do not pay enough to cover rent.

In addition to the twice-as-high SS tax rate, self-employed individuals also have the expense of supplying their own tools, licenses, etc., incurring expenses to get every 1099 or w-9 gig.

Why?

Because employers cannot supply too much equipment, etc. if they are going to hire contractors to avoid paying their Social Security tax.

These people often work for big companies.

This actually happens in sales jobs, even when employers have a big, nationally known showroom floor, like one less-than-upscale furniture retailer that I interviewed with after working for an upscale furniture retailer in the same affluent area of the city.

Whereas the upscale retailer paid $10 per hour plus commission on a draw, the big-box store paid on a 1099 basis, sort of like the way waitresses are paid, although I knew from working in the industry that furniture has a MUCH lower volume of business, making that form of payment absolutely brutal for the sales staff, although the owners get a huge SS tax savings.

Sadly, the truly fine retailer that was doing it the right way went out of business. They paid the SS tax for employees and commission, albeit in a convoluted structure, so, even when you sold so much that they gave you awards, you did not get much commission.

Later on, I encountered small retailers trying to use the same method of contractor-style employment. I told one of them in an interview: that means I have to subtract the difference in SS tax from my $10-per-hour pay.

It is out there a lot, along with all of the pyramid sales employment that requires costly, biannual licensing fees and state-required tests, in addition to gas expense, expense for leads, etc. You get paid on straight commission in small amounts, with about 10 people you do not know taking a cut out of each sale. There are no benefits.

A college degree in most areas is about as helpful in this zoo as licenses, experience, quota meeting, all day attendance and everyday attendance. This is a SOCIALISM FOR SOME country.

The pay-per-birth moms prefer the office jobs, where they can be extremely absentee in back-watching gangs, even in industries where licensing is supposed to be legally required, and they lack the costly, time-consuming licenses. They just hire / retain their fellow moms, adding a couple of licensed signers, and treating it just like the many other discriminatory, mom-gang office jobs.

So, assuming you do not have a spousal income or a child support check that helps covers rent, enabling you to work for low wages in mom-gang jobs, a good way to ensure an “independent” household involves having sex out of wedlock and producing multiple kids that qualify you for increasing amounts of monthly welfare for working part time to stay below the income limit for welfare.

You’ll get free or reduced-cost rent, free EBT groceries, monthly cash assistance, subsidized electricity, Headstart that costs $25 and free medical care, in addition to a child tax credit between $3,400 (child) and $6,318 (3 children) to spend freely on whatever momma wants.

Childbearing-age moms with unearned income hold an enormous number of the hourly jobs, retaining the jobs through what can only be described as an astonishing amount of excused absenteeism. They are not worried one bit about taxes; tax time to them means a $6,318 check to spend at the beach with a boyfriend. And they only pay 7.65% in SS tax.

Next year, those womb-productive, non-hardworking mommas will get $6,444 in tax-time cash for maximum sex, reproduction and womb productivity.

More $900 tattoos! More beach trips with bfs! More master bedroom furniture! Wooooo hoooo!

Senator Rubio thinks the part-time-worker moms should get an even bigger break on SS tax to accommodate an expanded child tax credit, even though that is the only thing they pay except sales tax, and they pay the lower rate of 7.65%. He could care less if it bankrupts the system that we all had to pay into—some of us at 15.3% from meager income—despite his state’s overwhelmingly elderly population. Conservatives love to pay moms their 100% freebie welfare and tax welfare for having sex out of wedlock via looting the US Treasury Department.

https://www.newsmax.com/t/newsmax/article/829924

Tax time means extra money for LOTS of mom pampering for part-time mom employees.

Tax time means something very different when you own a Main Street shop, generating 90-something thousand in gross income, but netting only in the 30s. Every few months, you OWE quarterly taxes in the [thousands].
You are NOT paid thousands by the Treasury Department for having sex and producing more children than you can afford. You owe them thousands.

Along with your overhead and business loan, it takes most of what you earn. You pay the higher 15.3% SS tax, unlike the part-time-worker moms who pay 7.65% SS tax. And you have two rents to pay: apartment and shop. The moms have free rent in Section 8 or reduced-cost rent in nicer apartments than most college graduates can afford called “mixed-income” apartments, for which the builders get a per-unit [tax credit] from Uncle Sammy.

This tax break will do nothing for such mom-and-pop businesses and, likewise, nothing for most 1099-contractor employees.

But as the Swampians raise the child tax credits for part-time-worker moms, more and more, they keep raising SS taxes on the self-employed who pay twice as much SS tax as moms getting many layers of cash from government for sex and reproduction, including bigly amounts of cash at tax time.

They raise SS tax even on self-employed people who make less than the $127,200 cap, although they are raising the cap on the rich, too, so that they pay more SS tax. A couple making $600k, like the one described in this article, still only pays SS tax on $127,200 in income, whereas mom-and-pop businesses and 1099-gig workers pay on every dime they earn at the higher 15.3% rate.

https://www.ssa.gov/news/press/factsheets/colafacts2018.pdf

SS tax used to be 15.5% for the self-employed and 7.5% for the employees.

Not anymore. But they can afford to up the child tax credits to $6,444 so that momma can **** her boyfriend for one more day in a beach hotel at taxpayer expense, with time off from work guaranteed in the back-watching gang of 98% childbearing-age mom employees where she “works.”

In reply to by Countrybunkererd

Muppet Endgame Napoleon Mon, 12/11/2017 - 14:07 Permalink

In today's politically-correct world, if you need dependents to list on your taxes, why not simply file any new births by your dogs, cats, bird or fish?  Filing these births will cause SSN assignment for these obvious "dependents" and, then of course, you can list these dependents on your tax return.Now, someone may someday accuse these births as not being "a child" but you can accuse them of being a racist, insensitive, or micro-aggressive...  I mean they'll likely also believe that marriage requires "a man" and "a woman" for Christs sake. Filing "a birth" is a trivial form. The term child appears but, to the SCOTUS, does that clearly mean human?  Have not the courts allowed us to choose what we term "a man", "a women" and so why not "a child"?    Its our right to now choose how we define these terms, right?In great support of this already, the current filing of a birth allows you to cite the sex as "ambiguous".  Isn't that great?   Vagueness already present.  We're on the slippery slope now folks.  Just look at the triviality of filing a birth...http://www.c-uphd.org/documents/vital/birth-certificate-instructions.pd…  (see checkbox #3 'sex')  .   

In reply to by Endgame Napoleon

spastic_colon Mon, 12/11/2017 - 10:26 Permalink

" It's unclear whether this bizarre exclusion was just an oversight or an intentional political hit on an easy target that no one in Washington DC would dare defend publicly: rich families organized as trusts."not "unclear" at all! who in america do you think has their families organized as trusts?? buffett? gates? bezos? mafia? etc etcthis just gives them more ammo to evade.....the above numbers were cherry picked.....do you really think someone making that much in income would be retarded enough to report all of it??

Snaffew Mon, 12/11/2017 - 10:26 Permalink

Are those incomes the norm for America?  $615k for a jersey lawyer and $524k for the avergae married couple? I guess the real America will never know.

NoDebt Mon, 12/11/2017 - 10:27 Permalink

Frankly.... so what?  They'll just change their own tax structure to avoid that.  It's what rich people with lots of passive income do.    

TeethVillage88s Mon, 12/11/2017 - 10:27 Permalink

Likely they should have repealed the income tax before attempting a postage card sized law.

- Likely we don't want any Tax Law written in Congress nor from Lobbyist to Congress

How can self respecting Libertarians join these thugs, they were thugs before, have been thugs since Vietnam War, and will always be thugs

74,000 pages in IRS Income Tax Code
75,000 pages in Federal Register
20,000 pages needed to be understood for Obama Care
Worse than Byzantium by far
Just like Roman Empire before it fell, rings true for Vatican too

rsnoble Mon, 12/11/2017 - 10:32 Permalink

2 or more persons could qualify as 'American people'.  Can we transplant dc to say somewhere in another universe? Mentally they are already there.

Gophamet Mon, 12/11/2017 - 10:33 Permalink

The fucking idiots in Washington will work out the kinks and make it even worse than healthcare. Need to check their chromosome counts to see how many of these mental defects have odd numbers!