How tax-cut plan could benefit Trump and wealthy staffers

  • White House chief economic adviser Gary Cohn speaks at press briefing, Thursday. ap photo

Published: 9/28/2017 10:26:16 PM

WASHINGTON — The White House insisted Thursday that the tax cuts President Donald Trump has proposed wouldn’t benefit the rich. But the blueprint suggests that wealthy Americans, including several in Trump’s administration, would likely enjoy a financial windfall.

Much of their income tends to come from investments and business profits, which stand to benefit from the proposed tax changes.

The president’s claim that rich Americans like him would actually pay more under his plan rests largely on how he’s keeping score of a plan still short on key specifics. Speaking in Indiana on Wednesday, Trump said he expected that wealthy taxpayers might phone him to complain but that he’d rebuff them.

But tax experts say several provisions in the plan — including lowering the top personal tax rate to 35 percent from 39.6 percent — make it likely that the wealthiest would enjoy the biggest bounty. Those provisions include a lower corporate tax rate; favorable rates for business profits used as personal income; and the elimination of both the estate tax and the “alternative minimum tax,” which was designed to ensure that the richest Americans pay at least some income tax.

“Based on what we know, this will be an enormous tax cut for people in the top 1 percent,” said Howard Gleckman, a senior fellow at the Tax Policy Center.

Estimates by the liberal Center on Budget and Policy Priorities show that fully half the total tax cut would go to the top 1 percent of earners, saving them an average of $150,000 a year. Here are some reasons why:

PASS-THROUGHS

The Trump plan would sharply reduce the taxes paid by businesses whose income is taxed at the owners’ personal rate. These are known as “pass-through” companies. Many are wealthy partnerships, hedge funds, real estate companies or so-called limited liability companies. Instead of paying at a top rate of 39.6 percent, they’d be taxed at 25 percent in the Trump plan.

Cohn said the administration would find ways to prevent wealthier taxpayers from abusing the lower rates and would write those restrictions into law. But the administration hasn’t said how. And Democratic lawmakers see this as a major loophole for the wealthiest earners. “This provision is a Grand Canyon-sized loophole that allows hedge funds and high fliers to convert ordinary income into low-rate pass-through income,” said Oregon Sen. Ron Wyden, the top Democrat on the Senate Finance Committee.

CORPORATE RATES

The Trump administration plans to reduce the corporate tax rate to 20 percent from 35 percent. Treasury Secretary Steven Mnuchin, worth an estimated $300 million, has said most of the tax savings will flow to workers in the form of pay increases and additional hiring. This is one argument — disputed by many economists — that the administration uses to claim that its plan would mainly serve the middle class.

But an analysis by Mnuchin’s own Treasury Department indicates that the vast majority of the savings would actually benefit investors, stockholders and top executives — in other words, wealthier Americans.

The richest 10 percent of Americans own nearly 94 percent of all stocks, with holdings that average $1.37 million, according to the Federal Reserve. Lower corporate tax rates would likely swell profits and possibly the dividends paid to shareholders. The Standard & Poor’s 500 stock index has soared 17.3 percent since Trump’s election, partially reflecting the expected profits from lower corporate taxes.

AMT

Eliminating the alternative minimum tax would also remove a significant source of Trump’s past tax bill. Tax policy experts on both sides say the AMT is flawed: Only a fifth of people with earnings above $1 million pay it. But a copy of Trump’s 2005 taxes that were made public anonymously show that the AMT accounted for most of his tax payments.

Without the AMT, Trump would have paid just $7 million in federal income and self-employment tax on $153 million in income — a rate of under 5 percent.

ESTATE TAX

Over the years, the ultra-wealthy have used trusts and other maneuvers to avoid paying estate tax. Cohn reportedly told Democratic lawmakers this year that “only morons pay the estate tax,” according to a New York Times report. If that’s true, there are plenty of wealthy morons: Alex Raskolnikov, a tax professor at Columbia University’s law school, notes that the expected cost of repealing the estate tax would be around $200 billion over 10 years.

“People do figure out how to mitigate the estate tax, but it’s difficult to mitigate the tax on a billion-dollar estate down to zero,” he said.


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