Originally published on Forbes.com.
Linda Sugin, Associate Dean for Academic Affairs, at Fordham University School of Law thinks about the Tax Cuts And Jobs Act in a much different way then practitioners like myself think about the act. While we are contemplating how to keep clients in compliance and take advantage of the goodies, she contemplates what values are expressed in the act in The Social Meaning of the Tax Cuts and Jobs Act, recently published in the Yale Law Journal The paper discussed five priorities and values reflected in TCJA:
1. The traditional family is best;
2. Individuals have greater entitlement to their capital than to their labor;
3. People are autonomous individuals;
4. Charity is for the rich;
5. Physical things are important
Traditional Family
The case that the act favors traditional family is that the new rate structure favors couples with unequal income. The act, in Professor Sugin’s view, stigmatizes head of household filers, as it requires tax preparers to take extra steps to verify HOH status. Then there is the elimination of the alimony deduction/income. Typically the income pickup will be taxed at a lower rate than the deduction yields, so the elimination of the deduction/income will cut the total after tax income of divorced couples. In terms of the increased child credit, Professor Sugin suggests what the cut could have done:
Instead of doubling the child credit, Congress could have used those resources to make the childcare credit refundable (and larger) so that low-income parents would receive a benefit. Tax benefits for expenses incurred in providing childcare promotes horizontal equity between taxpayers who pay for care and taxpayers who provide the care themselves, generally by a stay-at-home spouse. By choosing to increase the credit that is available to all taxpayers, including those who do not pay for child care, the TCJA privileges families with a stay-athome parent—who enjoy tax benefits without offsetting tax costs.
Capital Versus Labor
Professor Sugin noted the drive in cutting corporate rates to make the US more competitive and noted that corporate income can be subject to double tax. When it comes to new Section 199A:
Nevertheless, the TCJA also substantially reduced the tax imposed on income from noncorporate businesses, such as partnerships and other passthrough entities that tax income only to the owners and not to the entity. Consequently, the overall effect of the law is to reduce the tax burden across all holders of capital—people who earn money through investments. The TCJA exacerbated a distinction that already existed in the tax law. Capital income has long been subject to preferential rates and exempt from the payroll tax, but now it is even more preferred, regardless of the form.
I had noted previously that there seems to be a bias in the new law (even more pronounced in what was proposed) to tax money that you earn from working more heavily. At any rate Professor Sugin is concerned about the justice of privileging income from capital .
Proponents of the preference for capital income do not justify it on these terms. They argue that lower taxes on capital income incentivize more capital investment. That may be true, but it also may not be. In any case, that argument changes the subject because it is an efficiency argument, not an argument about social meaning and justice. Efficiency may be an important social value, but where efficiency and fairness are in tension, policymakers should be explicit
The theme of justice is a thread through this paper and other work by Professor Sugin. Taxation can adjust inequity created by the market. If the market under-compensates workers and overcompensates capitalists, then there could be a lower rate on income from labor (Which actually was the case prior to the eighties. There was a maximum tax on personal service income.). TCJA implies that it is the workers who are getting too much.
In instituting a preference for a broad range of investment income, the TCJA reflects the notion that investors have a stronger claim to their earnings than do others. Elevating capital holders to a preferred place by taxing their income less heavily than the income of workers implies greater moral rights to that income. A lower, preferential rate of tax on capital income suggests that market returns to capital holders are a closer approximation of what capital holders deserve; the heavier tax on labor suggests that their market returns are excessive by comparison.
One interesting observation Professor Sugin makes about 199A is this.
Confusing matters further, the new law carves out certain professions, including doctors, lawyers, accountants, and artists, from the reduced passthrough rate—for no apparent reason.
In a footnote she notes that Daniel Shaviro attributes the classification to a “sociological divide between the business and educated classes”. Somehow I have a hard time grouping accountants in the “educated class”. We have all the math we need by the fourth grade and the body of material we need to be familiar with, while not tiny, is dwarfed by just about any other field I can think of.
Interlude
I can’t resist sharing here the way the first two concepts come together. Imagine Robin and Terry who are living together without the burdens and benefits of matrimony. Robin is a partner in a law firm who receives a K-1 with $300,000 in income. Terry is an adjunct professor, barista, uber driver who makes about $20,000 a year. Marriage would give them a $60,000 deduction under 199A, unavailable to single Robin, Robin being in the field of law. You see how the mind of a tax practitioner works compared to a law professor. Reilly’s First Law of Tax Planning – It is what it is. Deal with it.
Autonomous Individuals
There are two ways that Professor Sugin sees TCJA as expressing the value of autonomy over interdependence. One is by eliminating the deduction for state and local income. An argument for deducting state and local taxes is based on interdependence:
It is possible to conceptualize state and local taxes as collective returns to communities , which should be shared by members of those communities. Institutions of government foster pretax income at every level, so state and local taxes, like federal taxes, can be understood as market correcting tools that direct returns to communities, rather than individuals.
Denying the deduction is based on a more individualistic view:
The TCJA treats state and local taxes just like private consumption. That model assumes that people pay taxes to buy services like schools and roads. Since expenditures for living expenses and luxuries are not deductible under federal law, state and local taxes should not be deductible if they are equivalent expenditures.
The other area in which Professor Sugin sees TCJA as promoting autonomy is that the 199A deduction encourages people to become independent contractors rather than employees and denies deductions for employee business expenses. I think there is a little more ambiguity here in that paying W-2 wages is one of the two things that higher income people can do to qualify for the 20% deduction. So the push toward independent contractor status is not unambiguous.
Charity Is For The Rich
The higher standard deduction will make for a lot more people not itemizing. Professor Sugin argues that only higher income people deducting charitable contributions is a problem.
By subsidizing only charitable gifts made by the wealthy, the TCJA sends the message that charity is an important public priority for the rich, but not for others. This is problematic. First, it reinforces the notion that government need not provide the infrastructure necessary for equality and opportunity since the rich have a responsibility to provide private support for public goods. Relatedly, this message gives the rich the false and dangerous impression that their charitable giving is a reasonable substitute for paying taxes. Finally, the rich and the poor support different types of institutions, and privileging the giving of the rich undervalues the types of institutions supported by the poor.
Physical Assets Are Important
This is about unlimited expensing of tangible assets and I have to say that I don’t entirely follow the argument. Professor Sugin suggests that maybe the Tax Cuts And Jobs Act was not so much when it came to the jobs part.
The real message of these provisions directly contradicts the rhetoric that its adopters spread about the law. The TCJA’s proponents claimed that the law was about creating jobs and improving the well-being of workers. But the law instead favors machines and business owners. While it is possible to make an argument that investments in machines will require more people, or that more money for investors will trickle down to better wages for workers, there is nothing in the rules adopted in the TCJA that gives taxpayers incentives for the second order effects. It is just as likely that business owners will replace workers with machines.
Tax Reform Maybe Not
I spoke with Professor Sugin about her article. One thing that we both seem to agree on is that TCJA is not well thought out tax reform as was the Tax Reform Act of 1986. I asked her if this type of deep thinking about the tax law comes across in her teaching. What she told me was that the law school classes will give students a sense of the arc of themes that run through the law and holistic views of the statutes, which will inform students when they get into the details of practice.
The other thing I learned from our discussion which I probably should have known about is what the economists call the “optimal tax model”, which is kind of the holy grail of economic thinking about taxes – designing a tax system that minimizes “deadweight loss” from the economic distortions that taxes create. For example, taxes on labor encourage leisure – at least if you are using “homo econimicus” as your model of human behavior.
Professor Sugin believes that justice is also an important consideration. As she says in the video below the tax law is the most coercive and intrusive instrument of government that just about everybody has to deal with. That makes the tax law a good test of whether we govern ourselves fairly.
This Jon Roemer video where Professor Sugin explains her overall view. At less than five minutes it is a really good lifespan investment.
Thinking like Professor Sugin is exactly what I tell people not to do when they are doing tax planning. Reilly’s First Law of Tax Planning – It is what it is. Deal with it. The thinking of scholars does work its way into the process, but then there is the sausage-making of the political process. It is worthwhile though for us to take a step back every once in a while and observe that, for example, Section 199A probably doesn’t even make good nonsense.