The below analyzes each of the three proposals and their impact on Trump and other wealthy Americans. We can only estimate how many billions of dollars Trump stands to gain from his own tax plan as he has yet to release his tax returns but it’s not chump change.
I hope this finds you headed for a weekend with at least some time out of the office.
The Trump Loophole
• Pass-Through Relief for the Wealthy
Arguably the largest, Achilles heel in the tax plan is the so-called “Trump Loophole,” his proposal to reduce the top marginal corporate tax rate from 35 percent to 15 percent. Under the Trump plan, pass-through entities would qualify for the corporate rate, instead of paying a much higher individual rate. This is a boon for the wealthy who can report large portions, if not all, of their income as “business income” thereby avoid the higher rates faced by average Americans earning wages and salaries.
This loophole has largely emerged due to the large reduction of the top marginal corporate rate, without a similar decrease of the top individual rate. Such discrepancies between the individual and corporate tax codes is “practically a recipe for tax avoidance.” And while many small businesses are pass-through organizations, at present approximately 70 percent of pass-through income goes to the top one percent of earners.
• Benefit to Trump Inc.
Trump’s organizations would stand to gain from this proposal,l and his total tax burden, whatever it may be, would likely be cut in half, though it cannot be confirmed without his tax returns. Nevertheless, Trump himself has stated, “a lot of the rich are benefitting because of the reduced taxes for businesses.” Under Trump’s plan, the rich would benefit even more, particularly due to this unchecked loophole.
As this is a problem of the House Republican tax plan as well, some Republican staffers have acknowledged the problematic situation and are looking into ways to address it. One idea in the works is a prevention of personal service income from receiving the low corporate rate. However, Trump and his campaign aides are not seeking to change this provision and any changes in the House Republican plan would not necessarily be reflected in the Trump plan.
The Estate Tax
• Relief for the Wealthiest
A second component of Trump’s plan that conspicuously favors the rich is his proposed repeal of the estate tax. Trump has called the tax, which applies to estates over $5.45 million for individuals and $10.9 million for couples, “just plain wrong.” It affects the estates of 0.2 percent of Americans who die each year.
Trump himself would stand to benefit greatly from such a repeal. Assuming Trump is worth his stated estimate of over $10 billion, it is likely a 40 percent tax would be assessed on his estate upon the death of both Trump and his wife. As a result, eliminating the estate tax would save the Trump family approximately $4 billion.
This $4 billion could be used for a plethora of other efforts, to the benefit of lower- and middle-class Americans. But a repeal of the estate tax would solely benefit the wealthiest, and the $4 billion would instead continue to go towards the “successful” endeavors of the Trump family.
• Benefit to Trump Inc.
Unfortunately, without Trump’s tax returns, it is difficult to determine Trump’s exact net worth. Bloomberg News has estimated his worth to be far less than $10 billion, at approximately $3 billion instead. This decreased net worth would result in approximately $1.2 billion in estate tax revenue.
A Poisonous Combination
• Interest Deduction Plus Expensing
A third weakness of Trump’s plan is in fact a combination of two policies: continuing to allow businesses to deduct interest, and at the same time permitting immediate write-offs, or expensing, for investment in equipment and buildings.
Under the first policy, businesses can deduct all interest paid on debts from their tax burden each year. The proposal to allow expensing on investment deviates from current law, which requires businesses to spread deductions on investments in equipment and buildings over multiple years. By including both policies in the same plan, Trump would provide negative tax rates for investments financed with debt.
This practice could incentivize companies to engage in projects that, without these tax breaks, would no longer be economically beneficial in terms of profits. In essence a business could take high losses in the first year of an investment, while creating ongoing interest deductions. These losses could then be carried forward and used to offset income in the future.
• Bipartisan Opposition
NYU law professor and former Obama advisor Lily Batchelder described this policy combination as“insane,” noting that it could “convert the tax code into a direct spending program” for all spending classified as debt-financed business investment. Republican economist Douglas Holtz-Eakin has expressed his confusion over Trump’s reluctance to pair expensing with a termination of interest deductions, calling the union “very weird.” Alan Viard of the American Enterprise Institute also labeled this generous treatment of businesses as “excessive.”
• Real Estate Relief
As real estate is one of the sectors that would stand to benefit greatly from such a policy arrangement, Trump would once again be manipulating the tax code to suit his financial interests, and those of his wealthy peers. As the self-proclaimed “king of debt,” this two policies taken together could allow him to continue to engage in questionable projects and investments.
While Trump has yet to officially release both policies as part of this tax agenda, he has in the past stated his support for full expensing and his reluctance to eliminate interest deductions.
• Benefit to Trump Inc.
Estimates for how much Trump would save based on this toxic combination are once again difficult to quantify without information from his tax returns. But, as those who stand most to benefit in general are those in real estate with high utilization of debt, Trump looks like a prime candidate to reap the rewards.
Renewed Push for Tax Return Release
Democrats may address Trump’s failure to release his tax to the Senate in September. Senate Finance Ranking Member Wyden proposed legislation in May requiring major-party presidential nominees to disclose at least three years of tax returns within 15 days of becoming the official nominee. Should a nominee refuse to release his returns, the Treasury Department would be permitted to disclose them instead.
Yesterday, Sen. Wyden and Chris Murphy both stated their intention to push for consideration of the bill on the Senate floor. Sen. Wyden also noted that the Finance Committee routinely seeks the view three years of tax returns as part of their confirmation process for executive branch nominees. It is unlikely as of now that Majority Leader McConnell will allow this bill to receive floor consideration but stranger things have happened this year.