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Law Professors Just Published a Delightful, 34-Page List of Ways People Will Game the GOP Tax Plan

Because they were rushed through Congress at lightning speed and with barely more editing than your average blog post, the Republican tax bills are turning out to be full of kinks. Some of these mistakes—like the $289 billion tax hike on corporations senators accidentally wrote into their law at the last minute—have been widely covered. But many others are just being discovered. “The more you read, the more you go, ‘Holy crap, what’s this?’” Greg Jenner, a former top tax official in George W. Bush’s Treasury Department, told Politico this week. “We will be dealing with unintended consequences for months to come because the bill is moving too fast.”

Today, a group of 13 tax law professors and lawyers, many of whom have been vocal opponents of the Republican plan, published a 34-page paper offering a taste of what those unintended consequences might be. You know how people have been joking about incorporating themselves ever since these tax bills started kicking around? That’s almost certainly going to be a thing. Investors may be able to shelter their investment profits by stuffing them into C-Corporations, which are in line for a low, 20 percent tax rate. Many individuals could save on their income taxes by gaming proposed tax breaks for passthrough businesses—firms like partnerships and LLCs that aren’t subject to the corporate rate. Baseball players will probably start separate companies to collect all of their endorsement and licensing royalties while saving on taxes. A law firm could split itself into multiple pieces in order to minimize its associates’ IRS bills. Here’s how that last scheme would work:

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Law firm associates, LLC. Under the Senate bill, there is potentially a major problem as drafted: Employees may be able to benefit from the pass-through provision by forming a pass-through of which they are an owner. To achieve the tax savings, no longer be an employee (who cannot benefit from the provision); instead be an owner (who can benefit from the provision). For example, law firm associates (and other employees of the firm) should no longer be mere associates. They should instead be partners in Associates, LLC—a separate partnership paid to provide services to the original firm. Their “profit share”—in lieu of salary—from Associates, LLC would then be given the special low pass-through rate. There are restrictions on lawyers—since they provide a personal service, which is disfavored in the bill—from benefiting from the special pass-through rate, but those restrictions would not apply to these associates. So long as the associate (or really partner in Associates, LLC) makes less than $500,000 in taxable income (for a married couple) or $250,000 (for a single individual), they would be fully eligible. And that covers a lot of law firm associates, not to mention many other people who are now employees—but who may not be for long.

Some of the issues the professors found aren’t loopholes so much as unintentionally perverse incentives that could, for instance, encourage companies to shift employment and investment overseas (which is the exact opposite of what this bill is supposedly intended to do). But rather than run through each problem, one-by-one, I’d rather make a few big picture points.

First, as the paper’s authors note, all of these loopholes suggest that the GOP’s tax plans will cost far more than the Joint Committee on Taxation has officially projected. The JCT appears to think that the bill’s anti-abuse provisions are good enough to keep revenue from leaking out. Given what we’re learning, that is probably a fanciful assumption.

Second, it’s not clear how worried Republicans are about these loopholes, if at all. Some may even see them as a plus. The party is attempting to cut taxes as deeply as possible, and—other than Sen. Bob Corker—its members have largely treated deficit restrictions as annoyances to be worked around. My guess is they won’t put a ton of energy into making sure their final bill is air tight, especially since lobbyists aren’t likely to make much noise about mistakes that could save their clients money.

Finally, if Democrats do ever win another federal election, they’ll have to spend a lot of time fixing the half-considered, rough-draft of a tax code Republicans are busily slapping together. That means not just talking about how much to raise rates on the wealthy, but thinking about how to restructure and rationalize the system. The sooner they start considering that, the better; after all, we’ve just seen what happens when you try to write a bill the night before it’s due.

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