The Economic Substance Doctrine


In the midst of discussions around the repeal of Obamacare is the fate of a little known IRS policy, the economic substance doctrine, that has been used to help fund the Affordable Care Act. As President Obama’s team worked with House and Senate committees to figure out how to pay for health insurance for millions of Americans, they found and closed loopholes with policies like the economic substance doctrine that the ultra-wealthy had been using to reduce their tax burden.

Very simply: The economic substance doctrine gives the IRS the latitude to determine if an action has a “substantial purpose” beyond simply reducing taxes. The tax-avoidance action, in other words, needs to have economic substance beyond reducing the investor’s exposure to taxes. The doctrine has dramatically limited complex tax-avoidance schemes favored by ultra-wealthy Americans; it is not an IRS policy that middle class Americans can easily use to pay less on April 15.

The implementation of the economic substance doctrine helped designate almost 6 billion dollars for Obamacare funding over ten years. If Republicans choose to overturn the doctrine then a key funding source for the Affordable Care Act will disappear. It is not yet clear, however, what Congressional Republicans will do. The Freedom Caucus staunchly opposes regulation that gives the IRS more authority and they are distrustful of IRS administrators who have the authority to determine if a tax avoidance effort has economic substance. On the other hand, other Republicans have a long list of increased spending initiatives – from infrastructure to military spending – that could benefit from the increased tax revenue the doctrine represents.

The bottom line: If Donald Trump and Congressional Republicans choose to overturn the economic substance doctrine they choose to defund Obamacare and health insurance for millions of Americans in favor of tax-avoidance schemes for the wealthiest Americans.