Friday, November 3, 2017

Does the House tax bill subject all Donald Trump's income to a 25% marginal tax rate?

Via. May I play through?

How much of a tax cut is Donald J. Trump hoping to give himself in this week's House bill?

I think the correct answer is it's not clear yet, but there's certainly a good chance that it's meant to get him down to a top marginal rate of 25%, and a likelihood that that's what it's intended for, him and people like him.

The crucial question is that of the taxation of what is called pass-through income, or income a person receives purely by virtue of owning a business.

According to the conservative economic orthodoxy, making money this way is more virtuous—more beneficial to society—than mere working, because when you invest your money, or one of your ancestors does it for you, you are taking the heroic risk on which capital itself depends, whereas if you're just putting goods and services together you're just selling your labor. Investors are makers, workers are takers, as Willard Mitt Romney put it, or was it Paul Ryan, and this is why investment income should be taxed at a lower rate than labor income, as we do with capital gains (when you cash in the profits on a previous investment).

So in the Trump plan,  corporate tax is to be reduced to 20%, which is the trillion-dollar part of the bill; it eliminates most business deductions and credits, but that doesn't come near paying for the cut, per Alicia Parlapiano at The Times (getting rid of these loopholes would justify a cut just to 28.5%). The rest is just to reward companies for the bravery they display in existing and venturing Other People's Money.

Pass-through income is to be taxed at 25%, and there are safeguards installed to make sure nobody who works for a living gets to sneak in to the venturer's lower rate by incorporating herself into a sole proprietorship or LLC; those who provide professional services—doctors, lawyers, accountants, and I imagine freelance editors and proofreaders, piano tuners, plumbers, and pilates instructors—are explicitly disallowed. For the others (here I'm relying on Josh Barro/Business Insider), including shopkeepers and day traders, they can choose to pay according to a standard formula according to which their income is 70% salary (marginal rate 39.6% for those earning over $1 million) and 30% pass-through; or the businessperson can calculate his own ratio of pay to investment.

The whole thing will apply only to pretty large small businesses: 86% of small business owners make only enough money to be taxed at 25% anyway, so they wouldn't getting anything out of it. Donald J. Trump, with his 500-odd sole proprietorship companies, certainly would qualify for the 70-30 split, and his lawyers could almost certainly make it lots more, depending on how licensing income, which is the source of most of what he makes, is treated under the bill, and I think they just haven't decided, or haven't revealed, how they plan to do that yet.

But it's clear that those who get more pass-through income than salary are those at the very top of the income ladder, literally off the chart in the case of the chart below right, and the very very few:

Via New York Times.
And that's who the deal is for.

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