Jindal Tax Plan Creates A Wonderland Of Dodging

This post was originally published on Forbes Oct 12, 2015

Another week another candidate tax plan.  This time it is Bobby Jindal.  Frankly I didn't know very much about Governor Jindal.   It's Louisiana he is governor of, by the way, although you probably already knew that.  The one fun fact about Governor Jindal that has me rooting for him purely on entertainment grounds is this:

 Prior to immigrating to the United States, both his parents were lecturers at an Indian engineering college. At the time of their move to the US, Raj Jindal was to be a doctoral candidate in physics. They left Malerkotla, Punjab, India] in January 1971; six months before their son was born.

If we have a President Jindal, as night follows day, we can be sure of having a new bunch of "birthers" .  It is only a matter of time.  (The question of him being an anchor baby has already been raised.  Apparently, strictly speaking the answer is no.)  We're talking about the tax plan, though, and it is an interesting one.  In my mind there are a couple of non-sequiturs, but let's start with what might well be the most controversial part of the plan.

Not So Many Lucky Duckies-Make Way For Ducklings

Governor Jindal wants everybody to have some skin in the game, so his system would eliminate personal exemptions, making dollar one of income taxable.  There would be a 2% rate on the first $10,000 of income.  Frankly, I think this part of the proposal taken by itself has a great deal of merit as a simplification.  Of course a single person scraping by on $10,000 per year is going to feel every little thing, but four dollars a week of federal income tax will probably not be the straw that breaks the camel's back.

The plan indicates that there will be a nonrefundable dependent credit, so I guess under Jindal's plan the only lucky duckies will be the ones with ducklings . (The Wall Street Journal is credited with coining the term "lucky ducky" to refer to Americans who pay no income tax, because of their low income. Mitt Romney used the term 47%, which did not work out that well for him.)

The Earned Income Credit

Under Jindal's plan, the Earned Income Credit will be "transferred over to the payroll tax" and administered by employers.  Now one of the things that made EIC fraud work was that the EIC rate is higher than the self-employment tax rate, so that by pretending to have an extra $10,000 in income from hairdressing or dog walking or whatever else might sound plausible, you could come out ahead.  Not clear how his plan addresses that.  If it is by making it so the credit is lower than the SE rate, that would significantly fray the social safety net.

Lower Rates

The plan calls for three rates - 2% on the first $10,000 - 10% up to $90,000 and 25% over that.  The bracket boundaries are doubled for married couples.  Both the estate tax and the corporate income tax are eliminated, which brings us to the first non-sequitur.

The Deficit?

According to Governor Jindal:

President Obama has nearly doubled our national debt. It is now over $18 trillion and is the largest debt in the history of the world.

Governor Jindal's plan addresses this by reducing federal revenue by $9 trillion over the next decade (That is scored dynamically and is confirmed by the Tax Foundation. Static scoring makes it a cut of $11.3 trillion)

So Governor Jindal to cut the deficit has to cut expenditures by almost a trillion a year to make up for lost revenue before he can start, you know, cutting the deficit.  In the dessert first mode of the other candidates, so far, we get to hear about the tax cuts before the spending cuts.  The federal budget is just over $3 trillion.  You know that expression - "A billion here. A billion there.  Pretty soon you are talking about real money." - Doesn't work that way with a trillion.  A trillion is real money all by its lonesome.

Charity And Mortgage Interest Must Be Sacred

There will be no standard deductions, but the itemized deductions for charitable contributions and mortgage interest remain.  The mortgage limit will be reduced to $500,000.  The sacredness of the mortgage interest deduction is a little puzzling, but I don't think I will get into that here.

IRS Spending The Biggest Nonsequitur

Governor Jindal’s plan neuters the IRS, ending the “gotcha game” of tax code compliance and getting Washington out of our wallets. At four million words, it’s no wonder average people get trapped in a web of confusing regulations that read like an instructional manual for your life and your money: buy an electric car, don’t save money to give to your children, only one spouse should work. Let’s stop spending billions of taxpayer dollars to collect taxpayer dollars so that the IRS can make decisions with your money for you.

The IRS job can probably be boiled down into two components.  Determining the correct tax and collecting it.  Some people, like Ted Cruz, seem to believe that if it were very easy to determine the correct tax, we would not need the IRS anymore.  If you spent some time reading tax cases, you would realize how untrue that is.   Many of them are about situations where there is no question as to what the correct tax is, but ways and means must be found to see that it is paid.  Also many of the ways in which people misreport their taxable income are extremely simple.  They omit income and make up deductions.

More to the point, though, Jindal's plan opens up a veritable wonderland of tax dodging .  There is no corporate income tax.  So if you have a C corporation that is profitable, there will be no tax unless there are distributions (Under this regime I doubt anyone would want a flow-through entity except while it was unprofitable). The plan also calls for up to $30,000 per year in contributions to a tax-deferred account.  So if you are really doing well and can afford a plane or a boat or a second home or an expensive art collection who is going to own it?  Well say there is $100,000 of cash in your corporation.  Do you take a distribution of $100,000 and buy a $75,000 painting with the net or just have the corporation buy the painting leaving $25,000 in the till?

How hard will people push this?  It will depend on what rules are put into place to prevent abuse and how vigorously they are enforced.  The most obvious dodge is borrowing. The corporation has profits.  You need money to spend on the few things you can't plausibly run through the business, so you borrow it. It will be like going  back to the bad old days before the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986.  Only the taxpayers who want to pay nothing rather than 25% will be running a much lower risk.

We'll Be Busy For A While

If Jindal is elected and manages to put something like this plan into place, I'll probably be coming out of semi-retirement to help people transition to the new wonderland where the income tax really does become almost entirely voluntary.