Financiers could gain from proposed tax cut
Concerns on deficit
WASHINGTON, Sept 28, (RTRS): High-income Wall Street financiers could be unintended winners from a section of US President Donald Trump’s taxcut plan that is meant to help mostly small, “momand-pop” businesses.
Trump called on Wednesday for a new “passthrough” tax rate of 25 percent that could mean big savings for owners of sole proprietorships and partnerships who now pay 39.6 percent.
But it could also mean a windfall for partners in private-equity, venture-capital and hedge funds, unless Congress can figure out a way to block them from taking advantage of the new rate.
Ron Wyden, top Democrat on the tax-writing Senate Finance Committee, said Democrats supported a pass-through rate for small businesses, such as “a cleaner, a garage, a restaurant.”
He said Trump’s plan, however, would create “a whole new set of wealthy individuals being able to dodge their taxes through this new provision.”
At issue is the taxation of the roughly 95 percent of American businesses that are not public corporations.
Non-public pass-through businesses, such as sole proprietorships, limited liability companies and partnerships, pay no income tax themselves. Instead their profits “pass through” directly to their owners, who pay tax on them at the individual tax rates.
A small fraction of those business owners pay the top individual tax rate of 39.6 percent, higher than the current top corporate income tax rate of 35 percent.
Those business owners have long complained that the disparity is unfair, especially in view of the fact that many multinationals pay much less than the 35 percent statutory corporate tax rate by exploiting abundant loopholes and tax breaks available to large, global corporations.
Republicans have been eager to address the issue. Trump’s plan proposes a new tax rate of 25 percent for the pass-through income of “small and family-owned businesses.”
The problem, according to the plan’s critics, is that financial entities such as private-equity, venturecapital and hedge funds are all partnerships whose wealthy partners would see substantial tax savings on large portions of their income unless congressional tax writers find a way to exclude them.
The White House document that spelled out Trump’s plan signaled that the administration was aware of the potential problem but would leave addressing it up to Congress.
The document said: “The framework contemplates that the (congressional tax) committees will adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.”
Meanwhile, Trump proposed on Wednesday the biggest US tax overhaul in three decades, calling for tax cuts for most Americans, but prompting criticism that the plan favors business and the rich and could add trillions of dollars to the deficit.
The proposal drew a swift, skeptical response from Senator Bob Corker, a leading Republican “fiscal hawk,” who vowed not to vote for any federal tax package financed with borrowed money.
“What I can tell you is that I’m not about to vote for any bill that increases our deficit, period,” Corker, who said on Tuesday he would not seek re-election in 2018, told reporters.
Trump said his tax plan was aimed at helping working people, creating jobs and making the tax code simpler and fairer. But it faces an uphill battle in the US Congress with Trump’s own Republican Party divided over it and Democrats hostile.
The plan would lower corporate and small-business income tax rates, reduce the top income tax rate for high-earning American individuals and scrap some popular tax breaks, including one that benefits people in high-tax states dominated by Democrats.
Forged during months of talks among Trump’s aides and top congressional Republicans, the plan contained few details on how to pay for the tax cuts without expanding the budget deficit and adding to the nation’s $20 trillion national debt.
The plan still must be turned into legislation, which was not expected until after Congress makes progress on the fiscal 2018 budget, perhaps in October. It must then be debated by the Republican-led congressional tax-writing committees.
Analysts were skeptical that Congress could approve a tax bill this year, but that is what Republicans hope to achieve so they can enter next year’s congressional election campaigns with at least one legislative achievement to show for 2017.
Financial markets rallied on the plan’s unveiling, an event long anticipated by traders betting that stocks would benefit from both faster economic growth and inflation.
At an event in Indianapolis, Trump called the plan the largest tax cut in US history. “We want tax reform that is pro-growth, pro-jobs, pro-worker, pro-family and, yes, tax reform that is pro-American,” he said.
The real estate mogul-turned-politician, who promised big tax cuts as a candidate, told reporters he personally would not gain financially from the proposal.
“I think there’s very little benefit for people of wealth,” said Trump, who unlike many of his White House predecessors, has refused to make public his own tax returns.
Republicans have produced no major legislative successes since Trump took office in January, even though they control the White House and both chambers of Congress. Their top legislative priority, overhauling the US healthcare system, collapsed again in the Senate on Tuesday.
A comprehensive rewrite of the US tax code has eluded previous presidents and Congress for decades. The last one was passed in 1986 under Republican President Ronald Reagan.
Trump’s plan falls short of the sweeping, bipartisan package crafted by Reagan and congressional Democrats, analysts said.
The White House said that, under the proposal, typical middle-class families would have less income subject to federal tax. Trump said the first $12,000 earned by an individual and the first $24,000 by a married couple would be tax-free.
The plan would lower the top individual tax rate, paid by the nation’s top earners, to 35 percent from 39.6 percent.