The opportunity to game the system arises from the huge gap between the tax rate paid on individual income — up to 39.6 percent now, or 35 percent under the Trump plan —
and the low rate on business income the president proposes, of 15 percent.
But under the Trump tax plan, my tax rate would fall to 15 percent from 28 percent,
saving thousands of dollars a year — enough to justify those annoyances.
Eric Toder of the Tax Policy Center has an intriguing idea in which pass-through entities would distinguish between standard returns
that business owners receive on capital they directly put into that business, which would be taxed at the low rate, and returns above that level.
But if the tax code is changed to lower the corporate income tax rate to 15 percent,
from its current 35 percent, that creates a different fairness problem.
One blunt and powerful way would be for the tax code to allow only some fixed percentage of pass-through income to benefit from the lower tax rate.
Simply put: The bigger the gap between the ordinary income tax rate and the tax on pass-through businesses, the more incentive
that people — especially high-earning people — will have to find a way to game the system.