Credit where credit is due: President Trump’s tax plan is only one page long and yet contains volumes’ worth of dumb ideas. And there’s fierce competition for which part is dumbest.
Maybe it’s White House economic adviser Gary Cohn’s peculiar claim that reducing the number of tax brackets is how you simplify the tax code. The complicated part of doing your taxes is figuring out what counts as income and what’s deductible, not looking up the tax rate afterward in a table.
Maybe it’s the bullet point that promises to “eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers,” immediately followed by three bullet points pledging tax breaks that would almost exclusively benefit the wealthiest taxpayers.
Maybe it’s the suggestion that we need a multitrillion-dollar, deficit-financed tax cut — a.k.a. stimulus — when unemployment is 4.5 percent.
But probably the dumbest part of this entire presentation was the proposal to more than halve the tax rate on “pass-through” income.
This is the loopholiest of loopholes. It would further enrich the rich, unleash a major tax-sheltering bonanza, and impoverish Medicare and Social Security.
It also is unlikely to do anything to kick-start economic growth, as Kansas learned the hard way.
For those unfamiliar, pass-through income refers to business income that gets paid at individual income tax rates rather than corporate ones. Income earned by partnerships, sole proprietorships and S-corporations — the vast majority of all companies — falls into this category.
Lots of people, including White House officials, associate pass-through entities with small businesses. But plenty of ginormous companies get taxed this way, including hedge funds, big law firms, publicly traded partnerships and even — coincidentally? — the Trump Organization. In fact, according to the Treasury Department, more than 80 cents of every dollar earned by pass-throughs come from big firms (defined as companies with more than $10 million in income).
Because taxes on pass-through income are paid at the individual level at individual rates, the top rate for such income today is generally 39.6 percent. Trump’s plan would lower the rate for all pass-through income to 15 percent.
This would be a huge giveaway to the rich, despite Mnuchin’s earlier promises that the rich wouldn’t get a tax cut. Two-thirds of pass-through income is earned by the top 1 percent of Americans, according to researchers at the Treasury Department, the University of California at Berkeley and the University of Chicago.
Among those many rich beneficiaries, by the way, are people who use the “carried interest” loophole, a preferential tax rate associated with Wall Streeters that Trump loves to say he’s closing. The income these private equity and hedge-fund partners receive, after all, is pass-through income; Trump would let them trade one juicy tax break for an even juicier one.
More important, if income from pass-through entities is taxed at less than half the top rate for personal income, that’s a huge incentive for millions of people who are currently employees to start calling themselves “companies” — for example, to become a sole-proprietor “consultancy.” A Tax Policy Center analysis of an earlier version of Trump’s plan assumed that about half of high-wage workers would eventually become pass-through entities.
And self-incorporating (or self-LLC-ing) would allow people to reduce not just their income taxes. It would also let them shave down their payroll tax obligations, which fund Medicare and Social Security. That’s because once they turn themselves into a personal holding company, they could shift more of their pay from wage and salary income to corporate profits.
That sound you hear is the nation’s tax attorneys licking their lips.
Maybe you don’t care about all the rich people who stand to benefit from this, because you believe cutting taxes on pass-through income will spur job creation and economic growth. Trump officials have argued as much.
Kansas already tested this hypothesis, though, and is paying dearly for it.
In 2012, the state undertook a huge suite of tax cuts, including eliminating taxes on pass-through income. That overhaul, too, was supposed to “pay for itself.”
Instead, many more people took advantage of the loophole than expected, the state economy and tax receipts slowed to a crawl, and a gaping budget hole forced legislators to close schools early. The state’s credit rating has been downgraded multiple times.
Our “laboratories of democracy” have already proven what a daft, damaging idea this pass-through proposal is. Yet the White House pushes it still. The only question is whether it’s being kept alive by ideologues or incompetents.