Wednesday, December 13, 2017

Another perspective on the passthroughs

Mark the Knife posted a comment on a prior blog post of mine in this series. As I found it perceptive, I hope he doesn't mind my pasting it in here:

The push for a passthrough tax seemed based on some sort of odd understanding by members of Congress regarding "fairness" between passthrough businesses and C corps. I think there's a sense that corporate E&P is (ignoring the fact it isn't really "income") capital income par excellence, and income from passthroughs which is like E&P should receive the special rate.

So if I were to say what the theory behind the guardrails is intended to be, it's: If this passthrough were a business operating as a C corporation, would a particular allocation of income be retained (or allowed to be retained) in earnings and profits? If so, it deserves the special rate. Else, it should get the regular rate.

You can then see the two bills as focusing on a different problem--the House hates that labor income could be disguised as "E&P-like" income, and the Senate is aimed at attacking passthroughs that are the equivalent of corporate pocketbooks (a sort of personal holding company rule, but one that determines classification by looking to employment by a holding company instead of its income).

I don't think this is a terrific theory by any means, and certainly each bill deviates in some way from this theory, but it's my best shot at a cohesive theory thus far.

(Back to me): This strikes me as a very plausible account of how some of the thinking might have developed. Unfortunately, as grounds for policy it's incoherent nonsense (as I suspect Mark the Knife would agree).

A C corporation's E&P is kind of, very roughly, its "capital income" if not swelled by underpayment of salary to owner-employees. In a pure public company where only deductible compensation is paid to employees who lack significant owner interests, it's kind of a match for capital income, defined as the residue after paying labor costs, only it may include rents that a consumption tax would reach, not just normal returns that it would exempt. If you're using expensing to exempt the normal return, why exactly do you need to also have a low tax rate here? This was one of the points about the DBCFT - in principal the rate could be high without driving out capital a la an origin-based corporate income tax.

Now we go to the passthrough setting, and supposedly equity as between different types of entities - a nonsensical concept since (a) only people matter and (b) passthrough owners can incorporate - dictates also giving a low rate to the passthrough income that's left after paying out salary. Only, here we are very far from the setting of a publicly owned company in which owner-employees may only own a smallish piece. In the classic passthrough, a small group of owners has the whole thing, and has little need to pay themselves salary as that's just moving money between pockets of the same suit. So they all underpay themselves labor income, at least once the new law is in place, and they want a lower rate because - well, just because.

Mark the Knife's final nice point goes to the House versus the Senate having different aims. Apparently Ryan et al hate lawyers and such more, while in the Senate maybe they hate ?? more? (Not quite sure who they're after or why.)

I guess we'll see what comes out in conference, but we can be sure that it will still have no coherent rationale.

Tuesday, December 12, 2017

The passthrough rules versus consumption taxation

My last two blogposts addressed the incoherence of the passthrough rules, and their having no discernible underlying policy rationale (even one that is wrong) that can be stated at a more general level than "liked by the Congressional Republican leadership."

Let me put the same point in another way. Do the Congressional Republicans agree that a pure, full-fledged consumption tax, which is often described as exempting "capital income," would adequately address the pro-growth aims that the passthrough rule supposedly has?

A pure consumption tax is supposed to hit all consumption equally. It's economically equivalent to a wage or labor income tax, if those terms are defined broadly enough, leaving aside transition issues and the like. And such a tax, of course, taxes all labor income the same. (It may have graduated rates for a particular individual, as may a progressive consumption tax that is applied at the individual or household level, but that's a different point.)

The passthrough rule, by contrast, is premised on taxing some labor income at lower rates than other labor income. And despite some gesturing towards favoring the use of capital - from the disfavoring of personal service businesses, and for that matter the House bill's half-baked set of rules about electing your ratio of capital in the business - that is what it does. It taxes some labor income more favorably than other kinds, while also favoring rentiers (in the House bill) so long as they own businesses rather than owning financial interests in businesses that yield nonbusiness interest and dividends. (Yes, that's exactly as coherent as it sounds.)

The terms capital and capital income are not 100% clear, so one could define rents (extra-normal returns) as part of capital income if one likes, although my old friend David Bradford always used to say that in some sense they have got to be labor income. But he would agree that we're getting into semantics here. And there is no coherent principle that I can imagine, including those that I would disagree with, under which rents should be specially tax-favored. If anything, they can be taxed more highly without discouraging people from reaping them.

So if the passthrough rules ostensibly are in some way concerned about using capital, but they make distinctions and provide special tax benefits that would be unavailable in a system that exempted capital income, what exactly is the intent here?

I think the best one could do with this question, but I don't know that it can really be treated as a part of legislative intent, is to think about it as follows. A lot of the Congressional Republicans seem to believe that some people - the "job creators" et al - are superior to other human beings. They should be rewarded for being superior. And given their superpowers, this is bound to benefit the plebes somehow, someway. (Although why do they need the special tax breaks if they have such superpowers?) So they see some people, who may to an unsurprising extent overlap with their donors (or themselves before they entered politics) and say that these superior people, these Ayn Randite benefactors of all humanity, should be rewarded for their superiority by paying taxes at lower rates.

I can almost imagine a Ryan or Hatch saying: I don't know how to define these people in the abstract, but I know them when I see them.

This of course is not only anti-democratic and anti-egalitarian, but also anti-free market, insofar as it ends up distorting economic activity since we can't label the favored ones innately but only by observing what they do &/or report for tax purposes. But it's the best I can do at trying to define the subjective intent, whether or not the cognizable legislative intent, that underlies the promulgation of these rules (insofar as it is not simply crass and corrupt).

An added thought about passthroughs: is it supposed to be about having "employees"?

In my last post, I inquired into what "guardrails" might mean, in the context of the passthrough rules, given the lack of any underlying theory for who gets the benefit and who doesn't. But a further thought that occurs to me is, are the rules trying to incentivize having employees?

Evidence in favor of discerning such an intent might be that having employees may potentially make it easier to avoid materially participating under the House bill, and that the Senate bill in some settings limits the benefit to 50% of one's wages paid. And maybe the thing is about encouraging the growth of businesses that will provide jobs (?).

But here's an odd aspect of the passthrough rules, even at the level of "theory" (scare quotes because it's rather kind to say that there's a theory at work here). I'm being encouraged by the passthrough rate to run a business with employees instead of myself being an employee. But the people I might hire as employees are being encouraged to do the same thing, rather than being my employees. So for people who are actually weighing the choice between these two models - and note, of course, that it can be a purely formalistic choice via the claim of being an independent contractor, etc. - it seems to contradict itself. An employment relationship takes two to establish, the hirer and the hiree. One is being pushed towards it, the other is being pushed against it (other than being pushed merely not to call it an employment relationship).

Anyway, having employees doesn't do a great deal of work under the provisions, as a formal matter, anyway. In the House bill, you maximize your benefits by avoiding material participation, which is very different from hiring vs. not hiring, or hiring more vs. fewer people, or hiring employees rather than independent contractors.

In the Senate bill, the wages-paid "guardrail" (if that's what it is) can be met by my paying wages to oneself. E.g., say I earn $100,000 through a business that I'd like to get the 23% deduction for qualified business income, but it's just me. Not to worry, I pay myself $32,000 of reasonable compensation wages. Now my qualified business income is $68,000, and I can deduct 23% of that ($15,640) so long as it doesn't exceed half of the wages ($16,000). So I get the full 23% deduction, which, if my marginal tax rate is 38.5%, saves me $6,000 of tax for no obvious reason.

In sum, the idea of having employees, which ostensibly might relate to a policy rationale of encouraging job growth, doesn't do much to add the coherence to the passthrough rules that they would need for one to figure out what the "guardrails" are supposed to keep out.

What does it mean to have "guardrails" if there is no underlying theory of who should get the benefits and why?

I've been thinking about the issue of "guardrails" in relation to the passthrough rules in the House and Senate bills, with regard to whom they are supposed to keep out.

The problem I'm having in thinking about it is that, since there is no coherent underlying theory regarding who should get the benefit and why, it becomes difficult to figure out who would be getting it "improperly," and contrary to legislative intent, if we require defining such intent at a more general level than "industries that are friendly with the Congressional Republicans."

Let's take the underlying question of how the special rate for passthroughs relates to labor income, or wages in the economic (as opposed to the legal) sense. Wages in the legal sense don't get the special rate, but is it supposed to be for people who are providing labor income (even if combined with the use of capital) in the economic sense? Note that labor income in this sense, of course, extends to thinking about how to run the business, making decisions about its possible expansion, etc.

Both the House and the Senate bills appear to gesture in the direction of trying to reduce its association with doing work. But they do so ineffectively. The House bill has the supposed guardrail of reducing the benefit if you materially participate as defined by the passive loss rules, which would mean that the mere idler who owns a perhaps inherited business and trusts the hired hands to run it does better than the one who actually works.

But what's the reason for rewarding the idler? Doesn't it have something to do with decisions we think this person is making, which again is a form of work?

Note, BTW, that the passive loss rules were written to dampen the use of claimed managerial oversight as a mechanism for establishing material participation. But if you go back to the 1986 legislative history of the passive loss rules, you will see that this was based on a concern that people could fake exercising managerial oversight that was actually de minimis. (E.g., you just rubber-stamp whatever the folks whose business it actually is tell you to rubber-stamp.)

Then there is the exclusion in the House bill for personal service businesses. I have tended to interpret this as just reflecting that the House Republicans aren't particularly good friends with lawyers, doctors, consultants, etc. They are better friends with the real estate industry, the oil industry, etc. But there's a fig leaf on it of trying to sort out what's purely labor income - except that the people in the favored industries really have predominantly labor income too, at least if one defines it in the economic sense and they are actually running their businesses (not skiing in Gstaad while daddy's henchmen run the business).

We get to the Senate bill, and the personal service industries get some moolah from the provision until one's taxable income gets too high. And one doesn't get the special rate for W-2 wages that are actually paid, so long as they are reasonable compensation. But there's no requirement that one pay reasonable compensation - one can underpay oneself and get the passthrough deduction so long as one otherwise qualifies. So it taxes labor income favorably, so long as you aren't stupid enough (or constrained by liquidity concerns) to pay it to yourself as formal wages.

The whole thing also really has nothing to do with taxing "capital income" at more favorable rates than labor income.  The way to lower the tax burden on capital income, relative to a pure income tax, is to have expensing or its equivalent, not to tax interest income or the normal return, etc. The tax bills do this to a degree, e.g., by allowing a lot of expensing (plus interest deductions to make some capital income affirmatively subsidized rather than exempt!), although they don't exempt interest income.

But the favorable rate for passthroughs really has almost nothing to do with any of this. Again, those businesses are getting expensing, and if they're getting extra-normal returns (rents in economic lingo), without which all this becomes less interesting, then taxing these returns is efficient.

So one main aspect of the passthrough rule is a special, lower tax rate for labor income when it's done through a passthrough, the definition of which is pretty much circular (you qualify if you qualify, and it's hard to see why in terms of an underlying theory). Plus, Junior at Gstaad gets the special rate, reflecting others' past labor income that presumably is continuing to play out nicely, and again it's not quite clear why.

Against this background, what exactly is the guardrails' proper reach? It's quite hard to say when the underlying theory in support of the rules is so lacking. By lacking, of course, I mean not just incorrect but incoherent or nonexistent.

Monday, December 11, 2017

Double taxation, non-taxation, and regulatory clean-up under the House and Senate tax bills

I've often commented, in the realm of international taxation, that focusing on "double taxation" can be a suboptimal way of understanding the tax burdens being imposed. E.g., I'd rather be taxed twice on the same income at 5% each time, than once at 35%.

But "double taxation" rhetoric can sometimes identify settings where the overall marginal rate might seem, upon closer examination, to be unduly high.

Now, in the Republican tax bills, we get "double taxation" via the disallowance of state and local income tax deductions. Again, that alone just means one should look more closely, rather than showing that it inherently must be bad. But it is surprising that the "double taxation" framework has been so little mentioned, given the common practice of decrying estate taxes as potentially leading to "double taxation" of income that was taxed when earned and then might be taxed again when it's transferred at death (albeit, of course, that the estate tax runs off value, not gain from a prior value).

So if one is "double-taxing" income via denial of the state and local income tax deduction, one should take extra care that combined tax rates don't go too high. But if there is anything at all that the Congressional Republicans are not doing as they rush these tax bills through, it's take care.

Now Richard Rubin has a nice article showing that the phaseout of passthrough benefits for certain professionals, plus taxes in a state like New Jersey can yield marginal rates, for certain taxpayers and in certain ranges, in excess of 100%. In other words, earn more and you end up with less.

Meanwhile, allowing complete non-taxation - zero ever (at least federal) on potentially unlimited amounts of income that one earns - appears to be a bedrock principle of both bills, despite its being rather hard to justify.

To my knowledge, a 2015 House bill offered the first instance in the history of the U.S. federal income tax in which a proposal to eliminate the estate tax was not accompanied by proposing curtailment of section 1014, the tax-free step-up in asset basis at death. But that was just a for-show exercise, given that President Obama would be certain to veto the legislation anyway. Now, in 2017, they've done it again, and apparently for real.

In 2001, by contrast, deferred repeal of the estate tax WAS accompanied by rule changes to make sure that people who had untaxed appreciation, and who now wouldn't be facing the estate tax, would at least not get the basis increase as well, and hence would not be able to eliminate permanently the prospect of any federal tax on huge gains.

Say I bought a Renoir painting for $1M, and due to the run-up in the art market its value has gone up to $100M. Under the House bill, the accretion and the value will never face any federal income or estate tax liability if my kids sell it after elimination of the estate tax. Under existing law, the same thing happens under the income tax, but at least the estate tax offers a kind of back-up (and anti-"double taxation" arguments have been deployed in support of the income tax result).

Some people thought that getting rid of the estate tax without addressing basis step-up, being so unprecedented and hard to justify, must just be an accidental glitch. But then the Senate bill substantially scaled back the estate tax without doing anything about it either. This despite their scrambling for revenue at the end, so they could purport to make the overall target. This suggests that it must have been deliberate. (And it's not hard to see why if one thinks in terms of what the donors would like.)

In sum, as the bills now stand, in certain very standard situations, there can be marginal tax rates in excess of 100% for some people, and of 0% for others.

One last bit about allowing the tax-free basis step-up at death is that it hugely increases the attractiveness of using corporations as a tax shelter through which one can pay just a 20% rate on both one's labor income and one's investment income. If the second level of tax is merely being deferred, the gambit may become significantly less appealing. But with a lower tax rate today, plus no tax in the future if you play your cards right, it's another way of having tax rates decline as one moves up the income scale (since the wealthy can more easily arrange this). And again, after what we've seen from both houses, I can only presume that this is an intended effect.

Will the Treasury attempt to address some of the worst tax planning gambits in the tax legislation, in cases where it can be argued that a given gambit must have been unintended? It's hard to say. What was intended will certainly be up for grabs here. Plus, if the IRS and Treasury leadership address enforcement in the same spirit that, say, the EPA reportedly does, you could have a setting where aggressive tax planning gambits, yielding untoward results, that arguably could be addressed through regulatory provisions and/or auditing, will deliberately be left alone, by policymaking fiat from up high.

Saturday, December 09, 2017

There is no reason why

Patricia Cohen, in today's NYT, has a nice piece discussing the pass-through rules. It's called "Tax Plans May Give Your Co-Worker a Better Deal Than You."

Opening paragraphs:

In most places, a dollar is a dollar. But in the tax code envisioned by Republicans, the amount you make may be less important than how you make it.
Consider two chefs working side by side for the same catering company, doing the same job, for the same hours and the same money. The only difference is that one is an employee, the other an independent contractor.
Under the Republican plans, one gets a tax break and the other doesn’t.

The article then explains the rule's regressivity, its penalizing being an employee for no known reason, its treating some professions more favorably than others for no known reason, and its strong inducement to artificial tax planning.

Somewhere in the middle, it quotes me as saying that the House version "might be the single worst proposal ever prominently made in the history of the U.S. federal income tax."

In fairness to the negative merits of the Senate version, it hadn't at that point been developed yet, so I couldn't compare the two.

I think any fair-minded reader will agree that the rest of the article, both before and after my quote, offers a lot of support for my statement. We think of the tax system as aiming to address efficiency, equity, and simplicity. The passthrough rule, in either version, unambiguously makes all three worse.

There is no rationale for the provision. To move towards equalizing passthroughs' tax treatment with C corporations? But C corporations face a second level of tax. Plus, business owners can simply incorporate if they like, without its inconveniencing them in any significant non-tax way.

For job creation? The chef who gets the low rate is a job creator, and the other isn't? Qualifying for the lower rate has no link to job creation.

It involves second-guessing of the market, based on what theory of market failure it isn't entirely clear. Why not let pretax prices guide appropriate investment and labor choices, as happens with neutral tax treatment? It's incoherent as industrial policy.

What defenses have been, or can be, offered for it? There really are none. Jared Walczak of the Tax Foundation is quoted as saying that the provision might make sense theoretically in a vacuum. But I take him to agree with me that the actual proposal is bad, as he follows this up by noting that it's difficult to distinguish between wage income and business income. I would add that it doesn't even make sense theoretically or in a vacuum.

Business income IS wage income insofar as it reflects the labor of the business owner. Anything else that we want the owner to do, such as reinvesting or whatever, can be addressed via rules aimed at that particular activity (e.g., expensing for capital investments, which the bills have on top of the passthrough rules).

What if employees save, and the bank loans the money to people who want to found or expand their businesses? That has less merit, because the Republicans in Washington know more than the capital markets?

The article mentions that the proponent's "idea is that these [the pass-through] businesses will reinvest those higher returns and stimulate growth."

If that's the goal, stimulate investment! Or is this actually just a call for redistributing money to people whom it is thought have a greater marginal propensity to invest? Then why not just give more money to rich people, without running it through the passthrough structure?

The balance of the article then gives us a taste for all the incredible "job creation" that the passthrough rules will ostensibly encourage. E.g., "staff lawyers on salary suddenly turn into partners" so they can get the passthrough rate. High-earning dentists do better still by becoming C corporations that are taxed at 20%. (The tax bill has no guardrails for that either.)

Friday, December 08, 2017

The Sex Pistols and tax "reform"

A reporter with whom I was chatting earlier this week about the problems with the pass-through rules asked me: Yes, but there must be reasons for having the rules, aren't there?

I replied: "To quote the Sex Pistols, 'there is no reason why.'"

I evidently assumed he meant reasons other than funneling giant tax savings to donors.

The Sex Pistols quote comes from their great anthem EMI, an exhilarating explosion in which they almost seem to accept leadership of a movement, despite all the positivity that would imply.

The reporter was surprised (although perhaps he shouldn't have been) to hear a law professor quoting the Sex Pistols. He said he might try to use it, but apparently it didn't fit in. So I trust I'm not scooping him here.

And so it goes, and so it goes, and so it goes, and so it goes. But where it's going, no one knows.

More games they might play

Here's some more that just occurred to me, and that I don't believe we included in The Games They Will Play. My apologies to anyone else who may have published about this already - I'd link, but haven't seen it.

Suppose a high-priced consultant of some kind produces memos, and/or creates videos embodying the advice. (Nothing fancy, just talking into the camera from one's desk.) Or suppose at least that the business could be done this way.

Might we now, with appropriate structuring, have sales of property (the memos and videos) by a pass-through business that deals in property, rather than the personal service business of consulting?  This is not about capital gains treatment (where it's an old issue, and where one would need to meet the holding period requirement to get the long-term rate).  It's just to take the thing out of being a personal service business, not one that sells property, for purposes of the pass-through rules.

If the consultant also still communicates his/her conclusions via conversations with the clients, do we need price allocation between the consulting payments and the sale of property?

And here's another, although it's probably more of a stretch. If the consultant works at home, and also rents the home out via AirBnB, might we have a business of  making money through use of the home in multiple ways, and hence that uses capital? Again, existing rules address versions of this type of admixture (e.g., the rules limiting home office deductions), but the idea here is different; it's just about changing categories in the pass-through rules.

Thursday, December 07, 2017

Newly published report on taxpayer game-playing under the Republicans' tax cut act

I am among the thirteen signatories of a report thas has just been published online, entitled "The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the New Legislation."

Many thanks are due to the report's lead drafters, who were Ari Glogower, David Kamin, Rebecca Kysar, and Darien Shanske. It draws on many people's analyses, including not just that of other signatories, such as me, but also numerous non-signatories who have helped to advance the rushed public conversation.

Evidently, the notion of public service, based on caring disinterestedly about the tax law's quality and effects, isn't dead in the tax academy and the tax bar, even if it appears to need a respirator up on Capital Hill.

Here is the report's Executive Summary:

This report describes various tax games, roadblocks and glitches in the tax legislation currently before Congress.

The complex rules proposed in the House and Senate bills will allow new tax games and planning opportunities for well-advised taxpayers, which will result in unanticipated consequences and costs. These costs may not currently be fully reflected in official estimates already showing the bills adding over $1 trillion to the deficit in the coming decade. Other proposed changes will encounter legal roadblocks, that will jeopardize critical elements of the legislation. Finally, in other cases, technical glitches in the legislation may improperly and haphazardly penalize or benefit individual and corporate taxpayers.

This report is not intended as a comprehensive list of all possible problems with the drafting and design of the House and Senate bills. Rather, this report highlights particular areas of concern that have been identified by a number of leading tax academics, practitioners, and analysts.

In particular, the report highlights problems with the bill in the following areas:

Using Corporations as Tax Shelters

If the corporate tax rate is reduced in the absence of effective anti-abuse measures, taxpayers may be able to transform corporations into tax-sheltered savings vehicles through a variety of strategies. For instance, at the most extreme, it may be possible to shield labor income in a C-corporation so that it faces a final tax rate of only 20%.

Pass-Through Eligibility Games

Taxpayers may be able to circumvent the limitations on eligibility for the special tax treatment of pass-through businesses. For instance, under the Senate bill, many employees—such as law firm associates—could become partners in new pass-throughs and potentially take full advantage of the special tax treatment.

Restructuring State and Local Taxes to Maintain Deductibility

The denial of the deduction for state and local taxes will incentivize these jurisdictions to restructure their forms of revenue collection to avoid this change. This could undercut one of the largest revenue raisers in the entire bill.

International Games, Roadblocks, and Glitches

The complex rules intended to exempt foreign income of domestic corporations from U.S. taxation present a variety of tax planning and avoidance opportunities. For instance, one provision would encourage sales of products abroad, only for those products to be sold right back into the United States. Furthermore, several of these rules are likely to be non-compliant with both World Trade Organization rules for international trade and our network of bilateral tax treaties. Some of these rules also create perverse economic incentives, like advantaging foreign over domestic manufacturers.

Arbitrage Money Machines

The variety of tax rates imposed on different forms of business income in different years invite arbitrage strategies, whereby taxpayers can achieve an economic benefit solely based on the timing and assignment of their income and deductions.

Other Glitches

Other glitches in the proposed bills would haphazardly penalize taxpayers. For example, the reintroduction of the corporate AMT at the 20% rate in the Senate bill would vitiate key tax incentives and the basic structure of the international reforms. The proposal in the House bill to tax capital contributions to entities could penalize taxpayers for no justifiable reason.

Again, the report is available here.

Monday, December 04, 2017

One way to improve the tax bill (although it would still be awful)

My view of both tax bills that now await a conference is that they combine making revenue and distribution much worse with reducing the efficiency of the tax system and greatly increasing its complexity for high-income individuals, who will be absolutely swimming in new tax planning opportunities. It also represents a historically unprecedented use of the federal income tax system as a targeted weapons system for distributing favors to friends (beyond just using "rifleshot" special exceptions for one or two taxpayers, although we have those too) and, let's call it less favorable treatment for non-friends.

That said, there is one way that one aspect of the harm could be made less bad, although they won't be taking me up on this. A clear goal of the legislation is to ensure that special friends among the super-rich pay lower marginal rates than people in the upper middle class. I wouldn't dignify this with the label of "belief about fair distribution," since, for example, high-paid CEOs of publicly traded companies don't appear to be in the special friends group.

The aim, rather, is that very rich people they like, in industries they like, should pay lower marginal rates than those in the upper middle class or the less-favored super-rich.

But let's suppose they were willing to generalize, in a more principled way, their belief that very rich friends should pay lower rates than people in the upper middle class. Suppose they were willing to apply this belief to all very rich people, on a neutral basis within that group.

Then there would be a mechanism for reducing the tax bill's inefficiency and encouragement of tax planning, without doing any overall harm either to revenue or to distribution.

It would be a simple four-step process: (1) eliminate the passthrough rules, (2) address the use of corporations as a tax shelter, via the under-payment of owner-employee salaries and the "stuffing" of corporations with investment assets, (3) eliminate the tax-free step-up in basis at death, which greatly worsens lock-in for appreciated assets and ensures that huge profits enjoyed at the top will never be taxed at all, and (4) lower the top rate as much as you can given these changes, without sacrificing overall revenue or changing overall distribution. We might then have an overt, and perhaps significant, decline in marginal tax rates at the top.

This would eliminate the inefficient industrial policy and inducement to ridiculous tax planning that the current structure has, without making either revenue or distribution any worse than they are already. It would also amount to an honest statement of the actual distributional policy that evidently motivates the tax bills, insofar as there is a policy beyond that of rewarding donors and friends. And, for what it's worth, it would avoid treating the super-rich unequally (special friends better than the rest).

It would be interesting to know just how much rates at the top could decline in this scenario. But we know they won't do it, for at least 3 reasons: (1) lack of concern about the structural and tax planning problems that the bills are causing, (2) a preference for dishonestly concealing the actual distributional policy (hence all the lies about this being a "middle class tax bill"), and (3) the fact, that among the super-rich, they want to direct the largesse at their special friends in particular.