Trump plan's business tax cut seen as major boon for the Top 1%

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Despite President Trump's statement this month that "the rich will not be gaining at all," the tax plan that the White House and congressional leaders rolled out contains trillions of dollars in breaks for the highest earners and the wealthy.

"This is a huge tax cut for the top 1%," said Leonard Burman, an expert at the Urban-Brookings Tax Policy Center, after details emerged Wednesday. "Impossible to square with the president's rhetoric."

The tax framework sets up some drama and suspense over where Congress will set the top tax individual income-tax rate ― giving lawmakers flexibility to set it higher than the 35% that's mentioned in the document. But another provision, which would slash the rate paid by owners of partnerships and limited-liability companies, would be a bonanza for people at the top of the income scale, experts say.

The framework calls for capping the tax rate on such pass-through businesses at 25%. Business owners with high business incomes ― who currently face a top rate of 39.6% ― are in for major tax relief, policy analysts said.

In describing the new tax rate, the framework cites its impact on "small and family-owned businesses," but pass-through entities range from mom-and-pop grocers to major, closely held businesses, including Trump's companies.

Various provisions in the framework "would cut taxes more for the top than other taxpayers," said Kyle Pomerleau, director of federal projects at the Tax Foundation, a Washington policy group. But "the biggest driver is the special rate for pass-through businesses," he said.

With that provision, it "would be very hard to offset a tax cut" with the ideas that Republicans have put on the table in recent discussions, he said.

In its early messaging, the Trump administration is emphasizing the possibility that Congress will create a high top rate on ordinary income. That's one way to fulfill Trump's goal, a White House official said Wednesday.

Indeed, the framework calls for setting up three individual income tax rates, topping out at 35% instead of the current 39.6%. But it gives Congress the option to create a fourth rate that would apply only to the highest earners. One Republican member of the tax-writing Ways and Means Committee, who asked not to be identified because the discussions are private, expressed confidence that the panel will back the additional bracket.

The GOP framework includes other measures that would benefit higher earners and the wealthy. It would eliminate the estate tax (costing about $269 billion over 10 years) and the Alternative Minimum Tax (costing about $800 billion).

The document is silent on one issue Trump highlighted during his campaign: ending the carried-interest tax break for investment managers. Currently, it's taxed as capital gains, at rates as low as 20%. Trump had called for eliminating the break for hedge-fund managers ― though it's unclear whether that goal would have applied to other types of investment funds.

The White House official, who asked not to be named because the discussions have been private, said there wasn't consensus about what to do on carried interest at this stage, but Trump continues to support its elimination in the final legislation.

Generally, the tax framework calls for a tax code that is "at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers."

But tax experts said it isn't immediately clear how that will be achieved.

Treasury Secretary Steven Mnuchin has said repeatedly that the tax framework will end certain benefits, such as deductions and other perks, for high earners, lessening their benefit from lower tax rates.

Republicans describe the document as a guidepost for tax-writing committees to begin crafting their legislation. It contains two specific changes designed to benefit the middle class ― doubling the standard deduction to about $12,000 per person and an expanded child tax credit.

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"This is our best opportunity in a generation to deliver real middle-class tax relief, create jobs here at home, and fuel unprecedented economic growth," House Speaker Paul Ryan said in a statement.

Senator Pat Toomey said the House and Senate will probably pass separate proposals that'll have to be resolved into a single bill later. Toomey said the final legislation will go after tax deductions and loopholes and it's not clear it'll give the wealthy a net tax cut.

"My preference is there not be a tax increase for anyone. But with regard to very high income individuals I don't think we can guarantee that yet," the Pennsylvania Republican told reporters Tuesday.

House Freedom Caucus Chairman Mark Meadows said Tuesday that "it's important to lower the rates for everyone." But cutting the top individual rate, he said, is not a "red line" that'll scuttle his support.

Democrats are describing the plan as a broken promise. Senator Bernie Sanders, the runner-up for the 2016 Democratic presidential nomination, called the Trump tax plan "morally repugnant" for "providing hundreds of billions in tax breaks to the wealthiest people."

"'This is a complete violation of the president's pledge that the rich wouldn't benefit at all from his tax plan," said Senator Ron Wyden of Oregon, the top Democrat on the tax-writing Finance Committee.

Bloomberg News
Tax reform Income taxes Estate taxes Tax deductions Donald Trump Paul Ryan Bernie Sanders Ron Wyden Ways and Means Committee