By Jennifer Bird-Pollan
I woke up this morning to a viral video of Rep. DelBene of Washington State questioning economist Thomas Barthold, Chief of Staff of the Joint Committee on Tax (who incidentally became Chief of Staff of the nonpartisan organization in 2009, when Democrat Charles Rangel, then chair of House Ways and Means Committee, praised him heartily).
The optics are a progressive’s dream come true: whip-smart Congresswoman shows up white-haired, straight-laced, white man by revealing how the proposed tax bill screws over individuals while protecting corporations. And all across social media sites progressives are eating it up. The thing is, while I share my friends’ progressive values, and I love a good younger-woman-shows-up-an-older-man video, the line of questioning in this exchange is entirely misguided and misleading, and all of the students in my basic income tax course can explain why.
Congresswoman DelBene frames her questions as a binary choice between individuals and corporations. She asks Mr. Barthold if corporations will be able to deduct the costs of pens and pencils, while schoolteachers in her district will no longer be able to deduct such costs. The $250 above the line deduction for schoolteachers is, in fact, eliminated in the proposed bill, which seems like a silly political move on the part of the GOP, since it can’t be such a significant cost savings in the grand scheme of things. But, as my students could tell you, it is not a coincidence that Representative DelBene mentioned pens and pencils purchased by schoolteachers, and not, say by public defenders, or non-profit executive directors, or social workers. The general rule in our tax system is that “business expenses” are not deductible if you are in the “business” of being an employee. The tax code includes a specific provision allowing an above the line business expense deduction for educators (limited to $250), even though they are employees. For most of us, the expenses we incur that are associated with our jobs do not generate deductions. So Representative DelBene’s question makes it sound like the bill is especially targeting individual workers in this way, but it isn’t. The proposal to eliminate the special deduction for schoolteachers is a small change from the current situation.
Similarly, Representative DelBene pushes Mr. Barthold on the issue of the deductibility of state sales taxes. The proposed GOP plan notoriously eliminates the deduction for individual taxpayers of their state and local taxes (currently taxpayers can choose to deduct income or sales taxes, but because Washington State has no state income tax, Representative DelBene only asks about the sales taxes). The crux of Rep. DelBene’s questioning is to point out that state and local taxes will still be deductible to “corporations” under the proposed bill. As several of my co-bloggers have written about, this is a complex issue. You can read more about the proposed repeal elsewhere as well.
DelBene goes on to make the same points about property taxes, and about moving expenses. The proposed bill repeals or limits these deductions for individuals, but leaves them in place for “corporations.”
I put “corporations” in scare quotes throughout this piece, because what the proposed law really does is leave all of the above-mentioned deductions in place for businesses, whatever form they are in. If the income associated with the moving expenses, property taxes, or pens and pencils purchased by a taxpayer is business income, and the expenses were incurred ordinarily and by necessity as part of carrying on that business, then those expenses, as well as ALL expenses of that business will be deductible. This is so because our system seeks to tax only net income of a business, not gross receipts. We could have a healthy political debate about the legitimacy of some business expenses, and whether, as a policy matter, we want to prohibit the deduction by businesses of some expenses (Rep. DelBene seems to be concerned about allowing the deduction of businesses’ moving expenses incurred in moving out of the country), but the taxation of net rather than gross income strikes me as a relatively non-controversial point.
Let me be clear: none of this is to say that I think the GOP tax plan is good. In fact, I find it dangerously bad in many respects. But I would much rather have liberals and progressives who are concerned with good tax policy focus their efforts on exposing egregious elements of the proposal, like the repeal of the estate tax, while maintaining stepped up basis at death, or reducing the tax rate on business income, whether earned by corporations or pass-through entities, to 25%, or the fact that the “tax cuts” that the GOP claims will benefit the middle class, will very quickly turn into tax increases. These are the parts of the proposed bill that should outrage us, and we should not let ourselves be misled into thinking of the Joint Committee on Tax as the enemy. As a teacher of tax law, I often see a big part of my job as encouraging my students to think rationally about tax policy. For this reason I love Professor Marjorie Kornhauser‘s Tax Jazz project, and the new People’s Tax Page founded by Professor Ed McCaffery. Let’s keep focused on the issues, and not create outrage in places it doesn’t belong. There’s plenty to be outraged about in the stuff that’s actually there.
The Surly Subgroup 
Fascinating Professor. To drill down even more into the abyss unreimbursed trade or business expenses incurred by employees (in the trade or business of being an employee which is an odd characterization in and of itself, but I digress in my digression) are deductible, but because of several layers of opaque aspects of the tax formula rarely provide taxpayers with a tax benefit. For example, the Section 67 threshold for miscellaneous itemized deductions (MID) severely limits unreimbursed employee business expenses. And even if a taxpayer’s MID exceed the threshold then another barrier is whether or not her itemized deductions (after another potential cutback on overall itemized deductions for higher AGI taxpayers) exceed the standard deduction. Even if a taxpayer’s itemized deductions exceed the standard deduction she has to calculate her tax liability under the parallel alternative minimum tax as well as the regular tax and under the AMT miscellaneous itemized deductions are added back to determine tax liability so that AMT taxpayers do not receive a tax benefit from these deductible expenses. So while deductible unreimbursed employee business expenses often do not provide a tax benefit — this disconnect distorts sound decisions regarding tax planning resulting in inefficiency and mis/disinformation about how our tax system works and doesn’t work. This is not a good result for our economy, political discourse, or our souls … and that I believe is your excellent point my dear fellow blogger, tax prof colleague, and friend.
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Thanks very much for your comment, Francine! Of course you’re right that unreimbursed employee expenses are technically allowed as deductions, but because they are subject to the 2% floor on miscellaneous itemized deductions, as a practical matter most taxpayers don’t deduct them. We could have an interesting discussion about why that might be objectionable in its own right, and we’d talk about the things you mention above like the weird distortions and inefficiencies created by these kinds of rules. But you’re also right that my larger point was to say that we ought to at least be clear with each other and with the public about what the rules currently say, what proposed changes have been suggested, and where our objections should lie. Thanks for reading!
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Exactly! Because of complexity (thresholds/phase-outs/option and a parallel tax system) making certain expenditures that are “deductible,” (e.g., unreimbured employee business expenses) not (in most/many cases) generate a tax benefit, the benefits can be used to manipulate public opinions and sell mis/disinformation. For example the increased Child Tax Credit in the new bills is being sold as a tax cut for all Americans with kids, because the increase is not generally refundable it doesn’t provide a benefit to millions of lower income working families and their kids. It exists, but is an empty promise,
which as we all have personally experienced is much worse not only financially as in this case, but it undermines respect, trust, faith, and community. All attributes that are critical to a sound successful self-assessment system. It is maddening because tweets/charts/sounds bites/do not afford the opportunity to explain the many devils in the details.💔 Many think tanks are becoming quite effective with trying to embody this pitfalls and windfalls in pictures/charts/examples/stories … but the GOP is the master of the Universe in labeling/ punching down (e.g., death tax, unverified overpayments are fraud … ). Thanks again for highlighting this disconnect — some blame
can be allocated to the computerization of tax prep so that while many are self-preparing returns using it. They don’t see the calculations comparisons etc. in the black box.
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“Let’s keep focused on the issues…..” My issue is elimination of State & Local Taxes and the Medical Deduction. My mother requires full time care and is not in a Medicaid facility. Even with the 10% AGI on medical expenses this saved her $11,000 in taxes. If they wish to reduce Corporate & Small Business Taxes, they can do it in a way passes along tax credits to domestic job creation and business expansion. It is unfair to take it first out on a 91 year old’s health condition.
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On point!
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