Donald Trump, Republican party’s nominee for U.S. president (Photographer: Andrew Harrer/Bloomberg)

Trump Tax Plan Drops 15% Rate for Hedge Funds, Partnerships

(Bloomberg) -- Republican presidential nominee Donald Trump has dropped a major tax cut for businesses organized as pass-through entities, including partnerships, from his tax overhaul proposals, according to the latest version of those plans.

The change will make Trump’s plan much less favorable for private-equity partners, hedge fund managers and others who receive income from partnerships, limited liability companies and S corporations. Such entities don’t pay income taxes themselves, but pass their earnings through to their owners, who are taxed at individual rates.

Trump had previously touted the proposal for a 15 percent tax rate on income from partnerships and limited liability companies as a boon for small business -- but many hedge funds, private equity firms and other large-scale businesses also use pass-through structures. Because the current top individual tax rate is 39.6 percent, some high-earning individuals might have gotten a major tax cut under the plan.

Economic Club

A version of Trump’s plan released on Thursday, in conjunction with a speech the candidate delivered to the Economic Club of New York, made no mention of the proposed pass-through rate. And Alan Cole, an economist with the Washington-based Tax Foundation, said Trump’s campaign told him via e-mail that, going forward, “the 15 percent rate only applies to businesses that are taxed as corporations.”

Corporations currently pay a top statutory income tax rate of 35 percent. Cole and others at the right-leaning tax-policy group have helped evaluate Trump’s tax plan, including by gauging possible changes to it at the campaign’s request.

Cole said that Trump’s pass-through plan had been criticized by his Democratic competitor, Hillary Clinton. Scrapping the measure “gets more revenue without substantial costs to the common good,” he said. It also removes an incentive for people to reorganize themselves as pass-throughs to avoid taxes -- relabeling income without changing its nature -- he said.

Trump’s campaign didn’t respond to requests for comment. One of his advisers, economist Stephen Moore, told Bloomberg News in August that Trump was considering changes to the pass-through plan to prevent high-income individuals from trying “to scam the system.”

Working-Class Pitch

During his speech Thursday, Trump sought to portray his plan as beneficial to working-class Americans more than high earners. “It won’t even be close,” he said. By eliminating the 15 percent rate for pass-through income, he removed a major boon for high earners. More than two-thirds of all pass-through income flows to the top 1 percent of tax filers, according to the Center for Budget and Policy Priorities, a left-leaning research group.

Clinton’s campaign kept up its criticism of Trump’s proposals. Jacob Leibenluft, a senior policy adviser to Clinton, said the plan would “benefit Trump at the expense of millions of hardworking folks across our country who deserve the opportunity at a better future.” He also criticized the Republican for not releasing any of his personal tax returns. Clinton has released several years’ worth.

Trump has said he won’t release the returns now because he’s under an audit by the Internal Revenue Service -- and that he’ll release them once the audit concludes. It’s unclear whether that will happen before the Nov. 8 election. IRS officials have said there’s no rule barring individuals from releasing returns that are under audit. Tax specialists say doing so would subject Trump’s returns to public scrutiny that may find issues the auditors have missed.

Carried Interest

The latest version of Trump’s plan retains his plan to tax carried interest -- that is, the portion of investment profits paid to investment managers -- as ordinary income instead of at the 23.8 percent rate that applies to capital gains. The effect of that promise, which would increase taxes for many investment managers, had been unclear before Trump scrapped the special rate for pass-through entities. Clinton also proposes to eliminate the carried-interest tax break.

‘Dynamic Scoring’

Trump’s campaign on Thursday released additional details of his tax plan, which he called “a $4.4 trillion tax cut” -- referring to the revenue cost of the plan over 10 years. But under so-called “dynamic scoring,” a method that analyzes the cost of policy proposals by trying to predict their effects on employment, investment and spending over time, Trump said his tax plan would cost $2.6 trillion over a decade. Dynamic scoring is controversial among economists, who disagree on its accuracy.

“Our economic team has further modeled that the growth-induced savings from trade, energy and regulation reform will shave at least another $1.8 trillion off the remaining cost,” Trump said -- leaving about $800 billion in lost revenue over the decade. “This money can all be saved through simple, common-sense reforms,” he said.

Penny Plan

Trump called for cutting 1 percent of spending “on non-defense and non-entitlement programs.” Trump has previously expressed support for the so-called “penny plan,” which calls for repeating such cuts over a number of years. Trump said the cuts would amount to savings of “almost $1 trillion over the next decade.”

His campaign also filled in some additional details on Trump’s plan, which has evolved over the past 12 months. They include:

  • Three tax rates to replace the existing seven. They are 12 percent for individuals earning as much as $37,500 and couples earning as much as $75,000; 25 percent for individuals earning between $37,500 and $112,500 and couples earning between $75,000 and $225,000; and 33 percent for individuals earning more than $112,500 and couples earning more than $225,000.
  • More than doubling the standard deduction, which is mostly used by middle-class tax filers, to $15,000 for individuals and $30,000 for couples. The current standard deduction is $6,300 for individuals and $12,600 for married couples. The new proposal scales back from Trump’s original plan, which had almost quadrupled the standard deduction’s value.
  • The campaign provided new details on the “childcare affordability” plan that Trump released on Tuesday. The plan offers annual deductions to middle-income and high-income parents for average childcare expenses, which vary widely by state and region, and annual rebates to low-income parents of as much as $1,200. The campaign said Thursday that the plan will cover only children under the age of 13.