■ An incentive to invest in slipshod, money-losing ventures would be created by the combination of a new proposal to immediately expense investments with the Senate’s suggested delay in the corporate tax cut.
■ Rules designed to prevent highly paid doctors, lawyers and other service providers from cashing in on new benefits aimed at small businesses can be easily circumvented.
Even those who applaud the aim of reducing the corporate tax rate and transforming the way global profits are taxed worry that specific provisions will miss the mark.
Republican leaders, responding to political pressure to move quickly, defend the process, saying Congress has held dozens of hearings on tax reform in recent years.
Tax bills, by nature complex, are shaped by a galaxy of competing pressures. And withholding details until the final vote as a way of shielding the legislation from special interests is not a new strategy.
Yet several veterans of previous tax battles argue what is different this time is the mix of breakneck speed and enormous scope.
Consider the plan’s shift from a worldwide system, where profits are taxed no matter where they are earned, to a territorial system, which exempts profits earned outside the United States, bringing the American tax system in line with those in most other nations.
Because the switch could end up encouraging American companies to move even more profits offshore to avoid paying any domestic income tax, both the House and Senate versions of the bill impose rules to deter most multinationals with annual revenues of more than $100 million from exploiting such tactics.
But the effort to catch the giants under the new territorial system sets a financial bar that small and medium-sized businesses can limbo under. Mr. Shay said accounting firms were likely to start marketing off-the-shelf tax shelters allowing companies to set up foreign offices in low-tax countries like Bermuda or Luxembourg to shrink their tax bills.
“They’re just opening us up to the next round of tax shelters on the international side,” he said. “And the I.R.S., underfunded as it is, isn’t going to be able to check anything.”
At the same time, he said, some safeguards aimed at multinationals could still be bypassed. To reduce their home tax bill, companies like Google and Pfizer, for instance, often relocate patents and copyrights in tax havens and then sell use of that intellectual property back to their American subsidiaries at eye-popping prices. These are the higher-than-normal profits — which Senate bill drafters have cunningly called “Gilti” (for global intangible low-tax income) — that Republican bills are trying to stop from leaking out of tax system.
Multinationals, though, could avoid some of the Gilti tax by shifting more tangible property like production and research facilities abroad.
Other problems arise from the push to reduce the rate on pass-through businesses (sole proprietorships, partnerships and S corporations that currently pay taxes at the individual rate). Lawmakers have advertised the cut as relief for smaller businesses, but high-income investors in hedge and private-equity funds could use the provision to reduce the tax paid on rent and interest income by as much as a third.
Hedge-fund investors have an additional opportunity for a windfall with a simple reporting technique, said Steven M. Rosenthal, a senior fellow at the nonpartisan Tax Policy Center and former legislation counsel with Congress’s nonpartisan Joint Committee on Taxation. The funds’ decision to mark their trading positions at their market price (instead of their initial purchase price) would enable any gains to qualify for pass-through treatment at the newly reduced rate of 25 percent instead of being treated as short-term capital gains, at a top rate that nears 40 percent.
The pass-through changes present other tax dodges. Benefits for pass-throughs that provide services — like doctors, lawyers and accountants — are supposed to be phased out for individuals with incomes above $75,000 and for married couples with income above $150,000. But a firm could skirt that limit by creating multiple partnerships with different functions, with one providing services, and the other handling, say, licensing or leasing, said Dan Shaviro, a professor of taxation at New York University Law School who helped write the 1986 tax overhaul.
“There is not a single advantage this has, except for students of people like me, who will get paid more to figure out how to game the system,” he said.
Individual proposals that might make sense on their own can also set off unintended consequences when paired together. Although the Senate plan to wait until 2019 to cut the corporate tax rate to 20 percent from 35 percent has infuriated some shareholders, it saves money so that Congress can reach its budget goals. Some tax experts go further and argue that any cut should be phased in over a 10 year period to smooth out investment and reduce windfall gains.
Yet enacting a 20 percent corporate tax rate to take effect one year in advance while allowing investors to immediately deduct their expenses at 35 percent operates like a subsidy, and could encourage investing in money-losing projects simply for a tax gain.
“That could lead to silly stuff where you have a loss before the tax, but a gain after the tax,” Mr. Shaviro said.
(He offered an example for the mathematically inclined. Normally no one would invest $100 to earn only $90 back. But under the Senate plan where some business expenses could be immediately deducted at a 35 percent rate, you would get $35 back in 2018. So your actual cost is $65. By the time your $90 earnings are paid in 2019, though, the tax rate would be 20 percent. That would cost you $18 in taxes, and leave $72 in your wallet. So even though your investment lost $10, you are still coming out ahead: with $72 on a net investment of $65.)
Other experts pointed to constantly shifting cost estimates of proposals that suddenly gained or lost tens of billions of dollars overnight.
At the end of 10 years, the very safeguards that are supposed to prevent international tax avoidance actually lose money, according to the Joint Committee’s revenue estimates of the House bill, said Kimberly Clausing, an economist at Reed College. “This is a big giveaway in future years,” she said. “On net, the whole system is ineffective.”
The shortcomings are fixable to some degree, critics say, but the Republican strategy of pushing through a bill without Democratic votes before the end of the year — on tax rules that take effect a few weeks later — will not leave sufficient time.
To some supporters, though, that’s the price of success.
“Will they find things that need to be fixed afterwards because the process was moving so fast? Yes,” said Rachelle Bernstein, vice president and tax counsel at the National Retail Federation, which represents big chains like Macy’s and Saks Fifth Avenue.
But there are always technical corrections to tax bills after they pass, Ms. Bernstein said, and retailers have been waiting so long for a corporate rate cut that they don’t mind if it finally happens with an imperfect bill.
“It’s part of how the sausage is made, but it’s better to make this sausage than cut it off,” Ms. Bernstein said.