Pass-throughs remain a train wreck in the Senate Finance Committee chairman's mark

For reasons I have discussed in earlier posts, I continue to be baffled (other than on cynical grounds) by the Congressional Republicans' interest in creating lower tax rates for pass-through income. So it's a disappointment, though not a surprise, to find this bad idea being perpetuated in the Senate Finance Committee chairman's mark.

Basically, the chairman's mark provides a 17.4 percent (just over one-sixth) deduction for business income from partnerships, S corporations, and sole proprietorships, although generally not for service businesses (defined similarly to in the House bill).

While the tax rate cut is smaller at the top than in the House bill, in some ways the guardrails are even weaker.  Nothing about material participation as in the House bill. On the other hand, other than for sole proprietors the deduction is limited to 50% of the amount of related W-2 wages. So an S corp sole owner whose business earned, say $800,000, and who paid herself $200,000 of salary would only be able to deduct $100,000 (which is just under 17.4%) of the remaining $600,000 of business income,.  She thus might end up reducing her marginal tax rate by only 1/8, under these facts, rather than 1/6. And if, say, a law firm wanted to take advantage by having a separate capital partnership that owned the building and the goodwill and then used transfer pricing to siphon off a share of the profits, it would also have to contrive an excuse for salary payments from the capital partnership (not just the service partnership) to the partners, in order for them to get the deduction.

The provision remains unmotivated  industrial policy that sacrifices efficiency, simplicity, revenue, and progressivity in exchange for I can't see what (apart from pleasing donors and employing tax planners). Admittedly, in several respects it is not quite so laser-focused on people at the very top as the House bill. But still there's no tradeoff here - it's just bad tax policy.