Trump Plan to Slash LLC Rate Is Boon for Top Earners, Study Says
(Bloomberg) -- President Donald Trump’s proposal to slash the tax rate for partnerships and limited liability companies would mostly benefit the top 1 percent of Americans in terms of income, according to a study released Monday.
Pass-through businesses -- which include small operations like corner stores and free-lancers but also doctors, lawyers, consultants and vastly profitable hedge funds -- get their name from the way they file taxes: They pass their income through to their owners, who then pay tax based on their individual income-tax rates. The top individual rate is now 39.6 percent; Trump’s plan would cut the rate for pass-throughs to just 15 percent.
Trump and his top economic advisers have said their goals for a tax overhaul are to make U.S. business rates more competitive with other countries’ and to give middle-income households a tax cut. Treasury Secretary Steven Mnuchin has said in the past there wouldn’t be an absolute tax cut for the wealthy.
More than three-quarters of the benefit of Trump’s rate cut would go to the top 1 percent of households, which make at least $700,000 a year, according to the report by the Urban-Brookings Tax Policy Center. Those filers would get an average annual tax cut of about $76,000. The analysis assumed that the rate would be applied without any restrictions on what’s classified as income.
For Americans at the top of the earnings scale, or those with incomes exceeding $3.4 million, their tax cut would total almost $638,000 on average, according to the study.
By contrast, a 15 percent rate would reduce tax bills for fewer than 5 percent of pass-throughs in the middle-income category, lowering their tax bills by an average of just $370 a year, the study said.
“While pass-throughs such as partnerships and sole proprietorships are often described as small businesses and their owners characterized as middle-class, TPC found that low- and middle-income households would receive only a small fraction of the benefits of tax cut on pass-throughs,” Howard Gleckman, a senior fellow at the center, said in a blog post accompanying the analysis.
One reason is because almost two-thirds of people with pass-through income are already low or middle-income -- meaning they already qualify for low individual tax rates. So “they wouldn’t benefit at all from cutting the pass-through rate to 15 percent,” Gleckman said. “They are already there.”
The Tax Policy Center also estimated that the cost of reducing the pass-through rate to 15 percent would be as high as $2 trillion over a decade. A May 3 Goldman Sachs Group Inc. analyst note cited the same figure and said about half the cost would come from taxpayers miscasting higher-taxed wages as lower-taxed profits. Goldman Sachs and others have said the low rate would incentivize wage earners and traditional C corporations to reorganize themselves as pass-through entities.
House Ways and Means Chairman Kevin Brady said Monday he isn’t giving up on a tax package that pays for itself, even though Trump has said he’s willing to accept a bill that adds to the deficit in the short term.
House leaders have announced their own plan for pass-through businesses that would set their tax rate at 25 percent. The Tax Policy Center estimated that provision would cost as much as $665 billion over a decade.
Under the House plan, almost 90 percent of the benefits would still go to those in the top 1 percent, according to Gleckman.
The center calculated its figures based on the individual rates House Republicans have proposed -- 12 percent, 25 percent and 33 percent -- and with the assumption that the alternative minimum tax would be repealed. The report said that the center conducted the analysis to illustrate the possible effects of alternative policies, and not to show the impact of specific policies proposed either by the administration or by Congress.