Trump’s tax proposal would open an enormous loophole for his own companies

Bryce Covert

Bryce Covert Economic Policy Editor, Think Progress

President Donald Trump promised a huge, bold tax reform plan within his first 100 days aimed mostly at reducing taxes for the middle class.

But on Wednesday he released a whittled down outline centered around a reduction in the corporate tax rate, which is currently at 35 percent, to 15 percent. More details of a larger tax reform package, as well as how this one can be paid for and passed, are coming later, officials promise.

More troubling than Trump’s corporate tax reduction, though, is that the plan applies this rate not just to traditional corporate entities, but also to firms known as pass-through businesses such as law firms, hedge funds, and real estate companies. These companies — including LLCs, partnerships, and S corporations — currently pay taxes through the individual code because their money shows up on owners’ own returns.

Some of these are small, but they also include enormous companies, like much of the Trump Organization itself. Pass-through business income flows mostly to high earners: 70 percent of income made by partnerships and S corporations is captured by the richest 1 percent of Americans. In 2012, 40 percent of all S corporation income was made by firms worth more than $50 million, while 70 percent of partnership income went to a similarly sized group.

Allowing these companies to pay a 15 percent rate, and not the higher rates in the individual code for well off taxpayers, would be an big and very profitable loophole for them. Only income below $37,950 a year is currently taxed at 15 percent or less. But anyone who makes their income as a pass-through entity would enjoy that rate no matter how much they made.

It would therefore be difficult to ensure that individuals don’t incorporate as pass-through businesses to reap the rewards of such a lower tax rate. On Wednesday, Treasury Secretary Steven Mnuchin promised, “We will make sure there are rules in place so that wealthy people can’t create pass-throughs” and thus avoid the personal income rates. But Congress has already had difficulty policing pass-through business taxation.As an example from the Center on Budget and Policy Priorities of how enticing this can be, a lawyer earning a $1 million salary could incorporate as a pass-through business and thus save $180,000 in taxes under Trump’s proposal.

Trump himself is already poised to benefit from the lower tax rate. It’s impossible to know exactly how such a change would impact him since he has refused to release his tax returns. But he reported owning more than 200 LLCs in his presidential disclosure forms and in a follow up letter his attorneys indicated that his approximately 500 businesses are almost all pass-throughs. Given that he says his assets are worth $10 billion, this could potentially save him millions of dollars a year.

Just reducing the corporate tax rate, without also reducing it for pass-throughs, would come at a very high cost. According to the Tax Foundation, dropping the rate to 15 percent would reduce government revenue by $2 trillion over a decade, or about 5 percent. Add to that the estimated $1.5 trillion cost of allowing pass-throughs to pay the lower rate and the whole proposal becomes very expensive.

The Trump administration has maintained that the tax plan will pay for itself because it will boost economic growth, thus increasing tax revenues as businesses expand and more people work. But the unleashed growth would have to be dramatic. Just to pay for the standard corporate tax rate reduction, the economy would have to be about 5 percent larger.

An illustration of what can go wrong is on full display right now in Kansas. In 2012, the state passed a huge tax reduction package that included exempting pass-through businesses from state taxes. That ended up incentivizing residents to recharacterize their income as pass-through and not regular salary in order to take advantage of the change; more than 333,000 state residents filed taxes this way the year after the change.

The exemption ended up depressing state revenue by an additional 1.7 percent on top of all the money it was losing from the overall legislative package. It cost $206 million in 2013 and another $472 million in 2014. It’s part of why the state is now struggling to fill a budgetary shortfall of $1.1 billion, passing deep cuts in government programs and even leading state lawmakers to reverse course and vote for raising taxes (although Gov. Sam Brownback (R) vetoed it).

Kansas’s tax reforms, meanwhile, haven’t unleashed economic growth. Instead, its economy has grown at half the national rate and job growth has flatlined.

***

This was reposted from Think Progress.

Bryce Covert is the Economic Policy Editor for ThinkProgress. She was previously editor of the Roosevelt Institute’s Next New Deal blog and a senior communications officer. She is also a contributor for The Nation and was previously a contributor for ForbesWoman. Her writing has appeared on The New York Times, The New York Daily News, The Nation, The Atlantic, The American Prospect, and others. She is also a board member of WAM!NYC, the New York Chapter of Women, Action & the Media. Follow her on Twitter @brycecovert

Posted In: Allied Approaches

Union Matters

The Big Drip

From the USW

From tumbledown bridges to decrepit roads and failing water systems, crumbling infrastructure undermines America’s safety and prosperity. In coming weeks, Union Matters will delve into this neglect and the urgent need for a rebuilding campaign that creates jobs, fuels economic growth and revitalizes communities. 

A rash of water main breaks in West Berkeley, Calif., and neighboring cities last month flooded streets and left at least 300 residents without water. Routine pressure adjustments in response to water demand likely caused more than a dozen pipes, some made of clay and more than 100 years old, to rupture.

West Berkeley’s brittle mains are not unique. Decades of neglect left aging pipes susceptible to breaks in communities across the U.S., wasting two trillion gallons of treated water each year as these systems near collapse.

Comprehensive upgrades to the nation’s crumbling water systems would stanch the flow and ensure all Americans have reliable access to clean water.

Nationwide, water main breaks increased 27 percent between 2012 and 2018, according to a Utah State University study.  

These breaks not only lead to service disruptions  but also flood out roads, topple trees and cause illness when drinking water becomes contaminated with bacteria.

The American Water Works Association estimated it will cost at least $1 trillion over the next 25 years to upgrade and expand water infrastructure.

Some local water utilities raised their rates to pay for system improvements, but that just hurts poor consumers who can’t pay the higher bills.

And while Congress allocates money for loans that utilities can use to fix portions of their deteriorating systems, that’s merely a drop in the bucket—a fraction of what agencies need for lasting improvements.

America can no longer afford a piecemeal approach to a systemic nationwide crisis. A major, sustained federal commitment to fixing aging pipes and treatment plants would create millions of construction-related jobs while ensuring all Americans have safe, affordable drinking water.

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There is Dignity in All Work

There is Dignity in All Work