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.

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