President Trump is planning to include a massive cut in the top tax rate on “pass-through” companies, from its current level of 39.6 percent to a mere 15 percent, the Wall Street Journal’s Michael Bender and Richard Rubin report.
This will be sold as a boost for small businesses, and it is, but it is mostly a huge giveaway to the rich — including the president himself.
More than two-thirds of income at pass-through companies (so named because their structure makes them exempt from the corporate income tax, and their profits are instead taxed upon distribution to shareholders) goes to the top 1 percent.
The plan creates a massive loophole with which ordinary people can evade taxes. Instead of just working for Vox.com, I could form DylanCorp LLC, contract with Vox to provide writing services, and pay a 15 percent rate on DylanCorp’s earnings rather than my current 25 percent rate. For rich people paying a top rate of 39.6 percent (or the top individual rate of 33 percent that Trump proposed during the campaign), the incentive to do this will be even larger. A new study finds that when Kansas exempted pass-through income, the result wasn't more investment or growth but a surge in this kind of tax avoidance. This is not good policy.
It’s also a really, really huge giveaway to Donald Trump, the Trump Organization, and the entire Trump family. The Trump Organization isn’t a “C corporation.” It doesn’t pay corporate income tax. Instead, it’s structured as a collection of pass-through enterprises, so the vast majority of income accruing to Trump and his family is taxed through this system. Trump almost certainly pays the 39.6 percent rate on his earnings, so he’s cutting his own top tax rate by more than half. It’s the most transparently self-interested policy he’s proposed since taking office, and it will likely save him tens of millions of dollars.
Here’s the thing, though. We don’t know exactly how big a giveaway to Trump this is, because we don’t know what’s on his tax returns. We have no idea. We have a few details from his 2005 return, which suggests that he gets tens if not hundreds of millions of dollars in pass-through income annually. That return also implied that without the alternative minimum tax, which Trump wants to repeal, he would have paid less than 3.5 percent of his income in federal income taxes. Cutting the pass-through rate while repealing the AMT would probably reduce his tax burden to roughly half that level. Instead of paying $38 million, he could've paid less than $3 million.
Those are rough figures, though, from just one year in Trump’s life more than a decade ago. We know very little about the current state of Trump’s finances. We don’t know with any precision how much he makes from wages versus interest versus pass-through income. We don’t know how much he’s already paying in taxes on it. We don’t know which tax credits and exemptions his corporate entities are taking advantage of, and how they’d be affected by the corporate tax changes embraced by Trump and House Republicans.
We don’t know because Trump has refused to release his tax returns.
That’s totally unprecedented. Trump is hardly the first Republican president to propose big, deficit-exploding, inequality-increasing tax cuts. Presidents Reagan and George W. Bush did so as well. But they also released at least partial tax returns for every year they were in office. The public knew how they were making money. They knew where the money came from. They knew that, for example, Dick Cheney earned $36 million from the oil field company Halliburton upon leaving to become vice president.
Did knowing this stop the tax cuts? No. Nor did it stop Halliburton from allegedly receiving improper preferential treatment from Cheney and the White House once in office. But it let the public know what its officials had at stake in the policies for which they advocated. It helped watchdogs keep an eye out for malfeasance like Cheney’s alleged preferential treatment of Halliburton. It helped the public sort out whether the president was acting in his own best interest or that of the nation.
That’s an important kind of transparency. And it’s especially important with this president, on this topic. Corporate tax reform is an arcane matter involving changes to dozens of highly specific and complicated tax provisions. And Trump’s finances are vaster and more difficult to untangle than those of any president before him.
A lot of the concerns about Trump and corruption have been centered on flagrant violations, like using government resources to promote Trump resorts. That’s undoubtedly bad and should be policed. But if you’re a plutocrat bent on self-enrichment, there are more subtle, and more legal, ways to use the privileges of office to earn a lot more money. A paper by Berkeley economist Stefano DellaVigna and co-authors found that Italian Prime Minister Silvio Berlusconi's TV network, Mediaset, saw profits grow by at least €1 billion during his time as premier, not necessarily due to graft but because businesses shifted advertising to Mediaset as a way to lobby Berlusconi.
In the pass-through tax cut, Trump has found a similarly legal but still troubling way to use his powers to enrich himself. It’s unquestionably legal, requiring as it does an act of Congress, and it applies to many other rich people too. But just because Republicans in Congress appear willing to enable this kind of self-serving tax legislation doesn’t make it any less scandalous. Trump is trying to rearrange the tax code for personal benefit, and if he succeeds, he’ll net more money that he ever could by just using the government to market his resorts.