Trump Responded to Critics With Pivot on Partnership Tax Plan

The Trump Plan: Low Taxes, High Growth, Few Details
  • Clinton camp had said proposal would benefit Trump personally
  • Small businesses lose chance at tax break as he drops proposal

Republican presidential nominee Donald Trump quietly scrapped his plan to offer a major tax cut to partnerships and other businesses organized as pass-through entities -- a surprise change that will make his tax proposals less favorable for investment professionals -- after it prompted criticism.

His Democratic opponent, Hillary Clinton, had labeled his proposal -- which would have created a new 15 percent tax rate for such businesses -- “the Trump Loophole.” That’s because Trump’s most recent financial disclosure showed that he has interests in hundreds of pass-through entities.

Such businesses, which include limited liability companies and sole proprietorships, don’t pay income taxes. Instead, they pass their earnings through to their owners, who are taxed at individual rates. Because the current top individual tax rate is 39.6 percent, Trump’s 15 percent rate proposal represented a major tax break for many such owners. Still, scrapping the provision means retracting a potential boon for small businesses, which also use pass-through structures.

Clinton’s Criticism

“They were criticized on this by Hillary and didn’t want that criticism, and they also wanted revenue,” said Alan Cole, an economist with the Washington-based Tax Foundation. Cole said Thursday that Trump’s campaign told him via e-mail that in Trump’s latest plan, “the 15 percent rate only applies to businesses that are taxed as corporations.”

Trump has also proposed cutting the top rate on major corporations, known as C corporations, to 15 percent from 35 percent. While that’s the highest statutory rate in the industrialized world, the U.S. tax code allows for a variety of strategies that corporations use to reduce their effective tax rates well below that level.

As Trump’s advisers sought ways to cut the revenue cost of his tax proposals -- estimated at roughly $10 trillion over 10 years originally and now down to $4.4 trillion before including economic-growth effects, according to Trump’s campaign -- the pass-through rate became a target, said Cole. He 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.

Saving $1 Trillion

Dropping the provision probably saved as much as $1 trillion from the plan’s 10-year revenue cost, said Kyle Pomerleau, the Tax Foundation’s director of federal projects.

“This gets more revenue without substantial costs to the common good,” Cole said of the change. It also removes an incentive for people to reorganize themselves as pass-throughs to avoid taxes, relabeling their 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.”

The change -- revealed after Trump’s aides posted the latest version of his tax plan to his campaign website -- wasn’t mentioned on Thursday by Trump, who discussed his tax plan and other economic proposals during a speech to the Economic Club of New York.

Private Equity Response

During that speech, he sought to portray his plan as more beneficial to working-class Americans than to 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.

Private-equity interests weren’t happy with the change.

“It’s disappointing that the plan would favor C corps over the vast majority of businesses, which are in pass-through form,” said James Maloney, a spokesman for the American Investment Council, a Washington-based advocacy group for private equity and private investment firms.

Some small business owners would still get a tax cut under Trump’s plan, though it wouldn’t be as much. That’s because he proposes collapsing the current seven individual tax rates into three, lower rates -- 12 percent, 25 percent and 33 percent. Wealthy fund managers with lots of income would mostly fall into that top bracket, while some small business owners would likely pay the lower rates.

Trump’s Returns

Despite the change, 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.

Maloney said the private-equity group opposes that change. “Carried interest capital gains should remain as capital gains, and we will continue to advocate for this treatment,” he said.

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.

That cost “appears to be roughly comparable as a share of the economy” to tax cuts enacted in 1981 during the administration of President Ronald Reagan, and in 2001 under President George W. Bush, said Jacob Kaufman-Waldron, a spokesman for the Center for Budget and Policy Priorities.

‘Dynamic Scoring’

Policy makers had to roll back those cuts “in part due to their high cost and the pressure they placed on budget deficits,” according to an analysis the center published Thursday afternoon.

Trump said that 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, 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.

  • Capping itemized deductions at $100,000 for single filers and $200,000 for couples, a move that will limit the highest earners’ ability to reduce their taxable income.

  • 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.
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