Pass-through time – POLITICO

 In Politics

With help from Aaron Lorenzo

IT’S HERE! The wait for rules dealing with the tax law’s 20 percent deduction on pass-through income is over.

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The Treasury Department and IRS released proposed regulations in that area on Wednesday morning — and the key takeaway, via Pro Tax’s Aaron Lorenzo, is that multiple businesses will be able to combine into a single unit to claim the tax relief.

The goal, a senior Treasury official told reporters, is to keep those businesses — whose reasons for organizing through multiple companies frequently don’t have to do with taxes — from restructuring themselves in order to get the 20 percent deduction. Pass-through advocates say letting such companies aggregate — essentially, unite under one umbrella — would help them more fully capture the deduction, and get their effective tax rates near the average effective rates corporations pay under the new law, HR 1.

The rules for the pass-through deduction are among the most anticipated for the new tax law, and some of the major decisions — like which industries will qualify for the very coveted tax break — are still to come.

RUN IT BACK: It was barely two weeks ago that the 9th Circuit handed the IRS a big victory, reversing a Tax Court ruling in favor of an Intel subsidiary.

But it turns out the IRS will have to try to win at court again, after the 9th Circuit pulled back the ruling it issued close to four months after one of the deciding judges died, as Pro Tax’s Aaron Lorenzo reported.

Another three-judge panel now will take over the case, which centers on IRS rules dealing with how companies need to split stock compensation between an American parent and a foreign subsidiary. The IRS rules would force companies to deduct more of that compensation abroad, which isn’t something companies, especially in places like Silicon Valley, particularly want. (The deduction is generally worth more in the U.S., though that’s now less of an issue since Republicans cut the corporate rate from 35 percent to 21 percent.)

With all that in mind, there doesn’t seem to be much downside to Altera for giving the case another go. But Daniel Shaviro, a New York University law professor who believes the previous panel decided correctly, predicted that the next 9th Circuit ruling would be pretty similar to the last one. Judge Susan Graber — who was not only nominated by President Bill Clinton, but also went to Yale Law School with Bill and Hillary Clinton — will replace the deceased judge, Stephen Reinhardt, on the case. “I suspect that her being named is good news for those who think the withdrawn opinion was correct,” Shaviro told Morning Tax in an email. “She appears to be reasonable and a centrist, and so I would expect her to be impressed (as she should be) by the care and persuasiveness of the analysis in the withdrawn opinion.”

WELCOME TO WEDNESDAY, where Morning Tax has learned that a Republican has a slight lead in the race for former Rep. Pat Tiberi’s seat in Ohio and that the Roanoke Times is suing its old Virginia Tech football reporter for his Twitter feed. (One of these should probably be more surprising than the other.)

Speaking of surprise: It’s now been 11 years since a tornado struck Brooklyn and Staten Island, a development which surprised the New York Post, among others. (To be fair, the last recorded tornado in Brooklyn had happened back in 1889.)

Surprise us, with tips and feedback. Email: [email protected], [email protected], [email protected], [email protected] Twitter: @berniebecker3, @tobyeckert, @brianfaler, @aaronelorenzo, @POLITICOPro and @Morning_Tax.

CAN YOU SAY MORE INDEXING? The liberal Center for American Progress has become the latest to weigh in on whether capital gains should be indexed for inflation — and you can probably guess where the group lands on the matter.

Indexing capital gains could cost as much as $300 billion over a decade, more than enough to thoroughly bolster both the Earned Income Tax Credit and the Child Tax Credit, Andrew Schwartz and Galen Hendricks write. “It is clear that—if anything—Congress should move to equalize the tax treatment of capital gains and ordinary income,” Schwartz and Hendricks also noted.

THAT’S A LOT OF TAXES: There’s an increased energy on the left behind democratic socialism, and a range of more robust safety net policies, like a single-payer health care system, a jobs guarantee, paid family leave and free college.

One of the bigger issues with that democratic socialist agenda, Brian Riedl of the Manhattan Institute argues at Vox, is how to pay for it. Riedl calculates, with some caveats, that those policies would cost around $42.5 trillion over the next decade, on top of the more than $12 trillion in deficits already projected to be added on during those 10 years. Long story short, Riedl says even maxing out taxes on the wealthy and corporations, and adding a value-added tax and new payroll taxes, still wouldn’t cut it. Key point here: “Taxing the rich is not enough. America would need to match, or even surpass, Europe’s enormous tax burden on the middle class. There is no evidence that American voters will accept this level of taxation,” Riedl wrote. (A reminder that the U.S. is a low-tax country with a rather progressive federal tax system, but also has higher income inequality than lots of other industrialized nations.)

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