Tax Reform: Pass-Through’s and The President’s Proposal
Last week’s tax reform proposal from the Trump administration would cut the tax rate for “Pass-Through” businesses to 15% which will create opportunity for savings, and for abuse.
Proponents of the plan claim that the reduction in business tax expenses will be followed by those businesses building, growing, and hiring at an accelerated rate relative to the past ten years. Critics, however claim the measure creates incentives to minimize employee pay to reduce higher payroll and income taxes, among other problems.
Former IRS commissioner during Ronald Reagan’s terms, Lawrence Gibbs stated that if the measure becomes law, we “will have scams coming out of the woodwork…Large Tax-rate differentials encourage abusive tax planning.
The administration promises forthcoming details and action proposals to protect the system from abuse. The plan is missing many specifics, but the proposed rate cut would extend from true small businesses and firms to global firms, hedge funds, and the President’s own branding business and real estate. More than half of all business income in the United States is currently earned by pass-through entities, which has seen a marked rise in popularity in recent decades. More than half of that pass-through income is earned by top-bracket taxpayers. This bracket begins at $470,700 for couples filing jointly and $418,400 for singles.
Laura Sanders of Dow Jones Newswires writes, “It is still unclear whether the proposal would apply to self-employed workers and how much wealthy owners of hedge funds and private-equity firms would benefit, if at all.” The proposal may not directly affect private-equity partners as they are already taxed at the lower Capital Gains rates. Those owners of hedge funds who receive management income are currently taxed at the 39.6% rate would receive this 15% break.
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