Wednesday, December 20, 2017

Here's a "dynamic" effect of the 2017 tax bill that we CAN expect to see

As I've noted in prior posts, one thing the tax bill does is strongly encourage non-employees to incorporate their businesses, including personal service businesses, and pay tax at only 21% federal. Even if they end up paying a second level of tax upon withdrawing their funds, there is almost no downside. And if they don't need to withdraw the money directly, they may never end up paying that second level of tax. And Congress openly invited this result by providing that the tax rate for personal service corporations will be 21%, or the same as the general corporate rate.

Suppose a lot more people incorporate than the Joint Committee on Taxation anticipated when it scored the legislation. Then the overall revenue losses will be even bigger than the JCT predicted. But "corporate" revenue will be higher than forecast, due to the unanticipatedly high shifts.

One thing you can be certain of, if this happens: proponents of fake and overstated "dynamic" scoring will cherry-pick this number, and claim that it vindicates them. In short, an oversight that loses revenue will be treated by them as evidence that tax cuts actually do raise revenue. Of course, this requires staying tightly focused on corporate revenues, not overall revenues, but I am sure that this constraint will prove no difficulty.

Any good academic study of the revenue effects of the 2017 bill will, of course, take this issue into account. But competent and good-faith academic studies are not what I am talking about here.

UPDATE: BTW, this point was made to me by the WSJ's Richard Rubin. Didn't want to mention him by name without his approval.

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