This year’s leak of IRS tax returns has turned ProPublica into the accountant’s version of Robin Leach, host of “Lifestyles of the Rich and Famous”, whose exuberant and over-the-top narrative style made him the butt of innumerable jokes. Ostentatious! Wealth! Tax Breaks! It’s embarrassing.

The most recent example is their report highlighting how large family businesses are benefitting from the 199A pass-through deduction.  The article doesn’t claim that the profiled businesses are doing something wrong or that the deduction is a rifle shot that somehow benefits just high-income taxpayers.

No, the article focuses instead on how the deduction was implemented – Closed doors!  Smoky rooms! – and how much a handful of large family businesses are saving as a result. Opulence!  Mansions!  Here’s the key graph:

Usually the scale of the riches doled out by opaque tax legislation — and the beneficiaries — remain shielded from the public. But ProPublica has obtained a trove of IRS records covering thousands of the wealthiest Americans. The records have enabled reporters this year to explore the diverse menu of options the tax code affords the ultrawealthy to avoid paying taxes.

None of this is accurate, of course.  “IRS Records” is their euphemism for stolen tax returns.  There was nothing “opaque” about the development and adoption of 199A – as the ProPublica piece makes clear, it was all done in public with lots of vigorous debate.  And the “diverse menu” of options available under the TCJA included as many tax hikes on the wealthy as it did tax cuts.  Here is short list of the article’s shortcomings.

Crafted in Secret? 

ProPublica argues repeatedly that the 199A deduction was crafted in secret.  Opaque!  Murky!

Really?  S-Corp was heavily involved in the process leading up to the adoption of the TCJA and that process was anything but “secret.”  It entailed literally years of drafts, papers, analysis, and public debate.  One example of how ProPublica gets it wrong is the treatment of consulting engineers and architects.  The article states:

Sometime during this process, eight words that had been in neither the House nor the Senate bill were inserted: “applied without regard to the words ‘engineering, architecture.’”

With that wonky bit of legalese, Congress smiled on the Bechtel clan.

The Bechtels’ engineering and construction company is one of the largest and most politically connected private firms in the country. With surgical precision, the new language guaranteed the Bechtels a massive tax cut. In previous versions of the bill, construction would have been given a tax break, but engineering was one of the industries excluded from the pass-through deduction for reasons that remain murky.

Murky to whom?  Everybody in the tax world knows the 199A deduction excludes law firms, accountants, and other professionals whose business income might be characterized as a return on personal services.  This exclusion of “Specified Services Trade or Business” income was one of the more hotly debated parts of the bill.  Exactly who was in and who was out was a big deal.

The question for ProPublica’s readers shouldn’t be why the consulting engineers were able to get in, but why those other industries should be left out.  The lower, 21-percent C corporate rate isn’t limited by industry, after all.

Truth in Plain Sight

What’s interesting about the ProPublica piece is that when you set aside the silly Robin Leach stylistics, the truth of the 2017 tax fight emerges with some clarity.  As the article notes:

At the top of the Republican wishlist was a deep tax cut for corporations. There was little doubt that such a cut would make it into the final legislation. But because of the complexity of the tax code, slashing the corporate tax rate doesn’t actually affect most U.S. businesses.

So the priority was to enact a major corporate rate cut that excluded 95 percent of all businesses?  That much was clear from the beginning.  After acknowledging that reality, however, ProPublica promptly forgets about it and frames the 199A deduction as the centerpiece of the bill, rather than an afterthought.  And afterthought it was.

The history of the 199A tax benefit makes this clear.  It started in the House as a special, 25-percent pass-through tax rate that nobody could access.  In the Senate, it morphed into a 17.4 percent deduction sharply limited by payroll and capital investments and industry.

Far from being “overly generous” as ProPublica maintains, the initial Senate provision excluded numerous industries and every sizeable family business in the country.  You can read a real-time chronicle of the very public debate to fix it in the S-Corp archives.

What About All the Other TCJA Changes?

Finally, the ProPublica piece ignores all the tax hikes adopted as part of the Tax Cuts and Jobs Act (TCJA).  For example, the TCJA capped the State and Local Tax (SALT) deduction, raising about $80 billion a year in taxes, with more than half that amount coming from taxpayers earning more than $1 million.

By comparison, the 199A deduction costs Treasury about $40 billion a year, with less than $20 billion benefitting business owners making more than $1 million.  Many of the businesses profiled in the ProPublica piece were hit hard by the SALT cap, particularly the ones operating in high tax states like Wisconsin and California.

And that’s just one provision.  The new loss limitation rules applying exclusively to large pass-through businesses raise about $20 billion per year; the 30-percent cap on business interest deductions will raise (starting next year) about $25 billion a year; the repeal of the 9 percent manufacturing deduction raises $10 billion a year; and the elimination of R&E tax benefits will raise (starting next year) about $25 billion per year.

Get the picture?  The TCJA was a package of tax policies that both raised and lowered taxes owed.  For many large family businesses, their taxes went up under the TCJA, notwithstanding the 199A benefit.  By focusing on just one provision among many, ProPublica fails to provide a complete view of how these businesses fared under the TCJA.

How Much do They Pay? 

Which brings us to the bottom line, or more accurately, the lack of one.  There is no mention of bottom-line taxes-paid in the ProPublica piece.  For all their criticism of wealthy taxpayers, ProPublica neglects to quantify just how much these taxpayers actually pay.  Yes, we get it – a large pass-through business with lots of income and employees will likely have a large 199A deduction.  But how much did they pay after the deduction?  ProPublica has their tax returns, after all, so it is right there on the “taxes owed” line.

The fact that they don’t tell you tells you everything – it was a lot.  So much, in fact, that ProPublica doesn’t want you to know.  What might Robin Leach say about that? Unethical!  Biased reporting!