How the Trump tax plan could benefit wealthy Americans

(ABC News) -- In spite of President Donald Trump’s assertions that the proposed tax reform plan is “not good for people like me,” there are a number of ways that wealthy individuals could benefit.
 
Two of the clearest wins come from the elimination of the estate tax, which allows multimillion-dollar estates from being taxed before being passed on to heirs, and the repeal of the Alternative Minimum Tax (AMT), a tax applied largely to very wealthy people that effectively makes sure that they don’t avoid paying taxes because of loopholes.
 
Both are wins for the wealthy, experts say, given the relatively small segment of the population to which they apply. Beyond that, they are not entirely unexpected. Ending the estate tax, which Republicans refer to as the “death tax,” was a campaign promise of Trump’s.
 
Additionally, the AMT has one clear opponent: Trump. His 2005 federal tax return, which is one of the few portions of his tax returns that have ever been publicly released, showed that without the AMT, he would have only paid about $5 million in federal income tax that year, but because of the AMT, he paid $38 million.
 
Bringing in the wins through businesses
 
There are potentially bigger –- and less obvious –- areas where wealthy individuals could come out richer as a result of the proposed plan.
 
Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center at the Urban Institute, said that the bigger benefits for wealthier Americans will come from the way in which their businesses are taxed rather than how they are taxed as individuals.
 
Rosenthal said that while the unified framework of the tax plan released Wednesday left open the possibility of a fourth tax bracket, it is “unlikely” that it would be higher than 39.6 percent, which is currently the highest individual income tax rate.
 
By contrast, “where the rich make out like bandits is the lower tax rate on small business income,” he said.
 
The new unified framework states that “the maximum tax rate applied to the business income of small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations” will be limited to 25 percent, as compared to the current rate of 35 percent.
 

 
One important distinction to understand is the difference between corporations, which the new tax plan will tax at 20 percent, and the aforementioned small businesses and S corporations. Corporations are companies that pay tax on their profits, and when they distribute the profits to shareholders, those profits are taxed again. In S corporations, which are commonly known as “pass-throughs,” the companies pass their incomes to the owners and shareholders, and the incomes are only taxed once they reach the shareholders.
 
Rosenthal notes that companies “could be very large but qualify” as small businesses or family-owned businesses, citing the Trump Organization as one example. He said the Trump Organization constitutes both a family-owned business and one that includes hundreds of “pass-throughs.”
 
Expanding an existing loophole
 
Henry Aaron, a senior fellow in economic studies at the Brookings Institution, said that there may be more people changing their own tax status with the help of some lawyers if the proposed tax plan were to be implemented.
 
Aaron told ABC News that high-income individuals could change their status by setting up a legal entity so that they are taxed as S corporations rather than individuals. What this would mean is that rather than being a doctor employed by a hospital, for example, the doctor could change his or her paperwork to become a separate entity or S corporation.
 
Under that framework, the doctor sells his or her services to a hospital and therefore gets paid through the S corporation rather than as an individual. As a result, the doctor would be taxed at the proposed small-business rate of 25 percent, rather than the higher, personal-income tax rate, depending on the final details of the plan.
 
Aaron said that while it is possible for people to make such a move under the existing tax code, it would be less common because the difference in tax rates is not as significant.
 
“Things can exist but not be used because it’s not worth going through the hassle,” Aaron said.
 
In theory, if someone were in what is currently the highest personal income tax bracket of 39.6 percent, and if they went through the hassle of setting themselves up as an S corporation, they would have only seen a relatively small reduction in taxes. Under this proposed plan, the savings would be higher and could encourage people to use it as "avoidance channel," Aaron said.
 
Many of the details of the Trump administration's tax plan will still need to be hammered out by Congress, so the full extent of how the plan could benefit wealthy Americans remains to be seen.
 

© 2017 ABC News


JOIN THE CONVERSATION

To find out more about Facebook commenting please read the
Conversation Guidelines and FAQs

Leave a Comment