Republican presidential nominee Donald Trump has dropped a major tax cut for businesses organized as pass-through entities, including partnerships, from his tax overhaul proposals, according to the latest version of those plans.
The change will make Mr. Trump's plan much less favorable for private equity partners, hedge fund managers and others who receive income from partnerships, limited liability companies and S corporations. Such entities don't pay income taxes themselves, but pass their earnings through to their owners, who are taxed at individual rates.
Mr. Trump had previously touted the proposal for a 15% tax rate on income from partnerships and limited liability companies as a boon for small business — but many hedge funds, private equity firms and other large-scale businesses also use pass-through structures. Because the current top individual tax rate is 39.6%, some high-earning individuals might have gotten a major tax cut under the plan.
A version of Mr. Trump's plan released on Thursday, in conjunction with a speech the candidate delivered to the Economic Club of New York, made no mention of the proposed pass-through rate. And Alan Cole, an economist with the Washington-based Tax Foundation, said Mr. Trump's campaign told him via e-mail that, going forward, “the 15% rate only applies to businesses that are taxed as corporations.”
Corporations currently pay a top statutory income tax rate of 35%. Mr. Cole and others at the right-leaning tax policy group have helped evaluate Mr. Trump's tax plan, including by gauging possible changes to it at the campaign's request.
Mr. Cole said that Mr. Trump's pass-through plan had been criticized by his Democratic competitor, Hillary Clinton. Scrapping the measure “gets more revenue without substantial costs to the common good,” he said. It also removes an incentive for people to reorganize themselves as pass-throughs to avoid taxes — relabeling income without changing its nature — he said.
Mr. Trump's campaign didn't respond to requests for comment. One of his advisers, economist Stephen Moore, told Bloomberg News in August that Mr. Trump was considering changes to the pass-through plan to prevent high-income individuals from trying “to scam the system.”
The latest version of Mr. Trump's plan retains his plan to tax carried interest as ordinary income instead of at the 23.8% rate that applies to capital gains. The effect of that promise, which would increase taxes for many investment managers, had been unclear before Mr. Trump scrapped the special rate for pass-through entities. Ms. Clinton also proposes to eliminate the carried interest tax break.
Mr. 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. But 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, Mr. Trump said his tax plan would cost $2.6 trillion over a decade. Dynamic scoring is controversial among economists, who disagree on its accuracy.
