Tax

Donald Trump tax changes for small businesses raise concerns over benefits for wealthy

Martin Kovacs /

US President Donald Trump is targeting a tax overhaul, however, the release of the long-awaited tax plan’s details has been met with criticism that tax cuts for small businesses could favour the wealthy.

As part of the tax reform, Trump will see to slash the tax rate paid by corporations from 35% to 20%, while smaller businesses that pay a “pass-through” tax on the profits from partnerships and sole proprietorships will see their tax rate cut from 39.6% to 25%.

Trump’s tax plan also proposes to create three brackets for personal income tax, of 12%, 25% and 35%; impose a “surcharge” on the very wealthy; and double the standard deduction for income tax returns. Meanwhile, large US-based multinationals may be granted a “tax holiday” on the profits they make offshore.

The White House says the “dramatic tax cut” is designed to “boost to millions of American businesses and farms”.

Meanwhile, Trump has taken to his social media platform of choice, Twitter, to spruik the plan.

So, how has the plan been received?

A fact check conducted by The New York Times notes that “several misleading and false claims” were used to bolster the framework for the overhaul.

While lack of details in the plan make estimations of how the cuts would be distributed across income levels difficult, Trump and the wealthy would “almost certainly benefit”, the Times quoted Roberton Williams, an analyst at the Tax Policy Center, as stating.

A lot of contention lies around a proposed cut to the “pass-through” tax rate, which could deliver small business savings, but also benefit the wealthy.

Inc. reports that the plan potentially paves the way for wealthy individuals to incorporate as pass-through businesses, taking advantage of the tax savings.

The pass-through rate applies to non-public businesses that don’t pay income taxes, with profits instead passing through to the owner, who pays taxes on them at an individual tax rate; Inc reports approximately 95% of the businesses in the US structured as pass-through companies.

While many of those businesses stand to benefit, Reuters reports the proposal “could also mean a windfall for partners in private-equity, venture-capital and hedge funds, unless Congress can figure out a way to block them from taking advantage of the new rate”.

Frank Clemente, executive director of liberal advocacy group Americans for Tax Fairness, told Reuters the idea a lower pass-through tax rate only helping small business is “simply a hoax”.

“There has always been talk of how to carve out ‘good’ pass-through income from ‘bad’ pass-through income,” Reuters reported Seth Hanlon, with liberal group the Center for American Progress, as stating.

“The problem is it’s exceedingly hard to do and there is no way to draw clear lines that won’t be manipulated.”

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Martin Kovacs

Martin Kovacs is a journalist with experience covering the IT, consumer electronics, retail, finance and energy sectors.

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  • narrismo

    The United States are in a deficit of historic proportions. Their spending on health and military exceeds that per capita of other western nations, and social security continues to rise.

    The tax base of the US is also shrinking, common to all Western economies. The middle class in America are struggling, or have not recovered from the GFC. Wages of the middle to lower class remain low and discretionary spending remains weak. At the top end, Multinationals continue to abuse jurisdiction and loopholes to avoid paying their fair share. Rural workers particularly are struggling and America remains quite rural in many parts.

    The US charges workers tax from $1. This discourages workers into work. It also disproportionately impacts on workers on the lower end. I recognise that there is not the safety net here in Australia, however, encouraging people off social security and into work should be a priority.

    Without having read analysis from Politico or The Hill, here is what is instantly wrong with this plan;

    1. No tax relief for the lower tax bracket. There should be an automatic tax break up to $15,000, encouraging workers back into work and building a base of discretionary spending that was gutted post GFC.
    1a. The lack of cohesive policy on tax avoidance, instead, giving companies a free pass. The answer is in formation of an OECD council of tax avoision, to collectively reform and force companies to pay tax in the jurisdiction they collect it;
    1b. That corporations will pay less tax than Small Business is a slap in the face to the backbone of the US economy. Tax rates for these need to be consistent.
    2. No genuine attempt to attack the spending on healthcare; A universal government healthcare plan that will cut costs by 2/3rds and provide a better level of service at the middle and bottom ends of that to now;
    3. No genuine attempt to rein in military spending; the military industry is wasteful and contractors are overpaid.

    Overall, it’s the same junk policy one would expect from Trump. The Republicans sought to shovel it into Healthcare, which would have gutted the middle and lower classes’ healthcare, and failed spectacularly as their own turned on them. These guys want their Koch money. The deficit continues to balloon and there is no genuine attempt to deal with this.