Sunday, April 30, 2017

Forbes-The Flaw In Trump's Tax Plan - Why Don't We All Become Corporations?

“Neil Irwin [senior economic correspondent at The New York Times] has a nice look at what might be the biggest flaw in Donald Trump's tax plans, a loophole that would lead to many of us deciding to stop being human beings and become corporations instead. We actually saw this happen in the UK too when Gordon Brown [former Prime Minister of the United Kingdom] decided to change small company corporation tax laws. There was a rush to incorporate, revenue declined and the rules had to be reversed. Along with a set of regulations that never really have worked properly and yes still cause all sorts of problems.

“The specific point is that Trump is suggesting that the lower corporate income tax rate should also apply to pass through corporations, that is to methods of organisation that don't even pay the corporate income tax. This isn't a good idea. And it's not a good idea for a reason that Irwin gets close to but doesn't quite spot:

“ ‘The opportunity to game the system arises from the huge gap between the tax rate paid on individual income — up to 39.6 percent now, or 35 percent under the Trump plan — and the low rate on business income the president proposes, of 15 percent. He seeks to apply that rate to all businesses, including “pass-through” organizations such as limited liability companies and S corporations, and that is where the opportunity for games arises.”

Robert Reich:

Corporations are people, according to Mitt Romney and Republican Supreme Court appointees. But if Trump’s tax plan becomes law, in the future a lot of very wealthy people will become corporations.

The highest marginal tax rate paid on individual income (now 39.6 percent, 35 percent under the Trump plan) is far higher than the 15 percent tax Trump proposes for businesses.

So many high earners can be expected to turn themselves into businesses, and have their income passed through to them at the 15 percent rate. 


It’s a loophole tailor-made for partners in hedge funds, private-equity, and real estate (think Trump), but almost any rich person with a clever accountant and tax attorney will be able to take advantage of it.

Which will require that everyone else pays more taxes to make up the difference – or we don’t have enough money for schools, roads, national defense, health care, and Social Security.

It’s anyone’s guess whether Trump’s tax cut plan will get through Congress, but never underestimate the dependence of members of Congress on their wealthy patrons.

Photo Illustration By Sarah Rogers/The Daily Beast
The Flaw In Trump's Tax Plan - Why Don't We All Become Corporations?

Tim Worstall 

Photo Illustration By Sarah Rogers/The Daily Beast