Donald Trump’s campaign portrayed his economic policy speech Monday as a pivot, with the brash wheeler-dealer now proposing higher tax rates on the wealthiest than he had initially suggested in primary season.
But the real effect of Trump’s new tax proposals — if he actually stuck to them rather than abandoning this latest overhaul the next time it suits him — would be even more generous to the rich, and even more damaging to the nation’s finances.
Trump’s new signature tax policy idea is lifted straight from the dumpster fire that is Gov. Sam Brownback’s (R) Kansas. Although he now proposes a top individual income tax rate of 33 percent, Trump also wants to tax so-called “pass-through” income at just 15 percent.
That’s not quite as radical as Brownback’s debacle, which completely eliminated all state income taxes on earnings reported as pass-through income. But it’s based on the same concept and would bring about the same kind of destructive cash-hoarding by any American who can afford a halfway decent tax lawyer.
Pass-through income is any dollar of profit earned by a business but claimed on an individual tax return. Nearly everyone who uses pass-through tax tricks is exceptionally rich. Out of every dollar of pass-through income nationwide, 69 cents went to people in the top 1 percent of the income distribution.
And that’s just today’s status quo. Trump’s proposed change would almost certainly create a wave of new fake businesses launched by individuals eager to hide as much of their money as possible from Uncle Sam.
Anyone who can set up an LLC and convince the people who pay him to route his paychecks through that dummy company instead of using normal payroll can take advantage of pass-through mechanisms. Theoretically there are rules to prohibit the most flagrant abuses here, “but they’re rarely enforced,” former White House economist Jared Bernstein notes.
If the business that booked the profit before passing it through to the real beneficiary was an accounting fiction with zero other employees, no matter — it still benefits from the favorable treatment Brownback and Trump offer.
With so few hurdles to reclassifying one’s income as pass-through money, people flood into such arrangements to minimize their taxes. The practical impact of favorable rates for pass-through income is that “any putz with a tax lawyer will march into their boss’s office and declare that ‘I’m no longer Joe Paycheck, I’m Joe Paycheck, LLC,” Bernstein writes.
When Brownback eliminated taxes on pass-through money in 2012, his administration said 191,000 Kansas businesses stood to gain. In reality, over 333,000 Kansans filed their taxes as business owners in 2013 to take advantage of the zero percent rate.
That flood of newly-minted tax-free “businesses” ravaged the state’s balance sheet. Brownback’s team estimated the break would cost the state $160 million, but the price tag topped $206 million for 2013. Along with the governor’s other trickle-down experiments, the pass-through gimmick blew a nearly $1 billion hole in the tiny state’s budget.
While Brownback’s full repeal of all taxes on pass-through money was an innovation of sorts, he and Trump are each paddling in a venerated conservative stream. There is a large gap between the sorts of businesses people set up to elude the taxman and what the average voter imagines when she hears about an “S-corp” or a “business owner.”
Republicans have preyed on that gap in understanding to pretend that tax rules beneficial to the wealthiest are in fact populist favors to the everyman. Early in President Obama’s tenure, GOP leaders framed such paperwork-only firms as “small businesses” to attack his plans to tax the wealthy. But in reality, pass-through money is almost all going to book authors, multi-billion-dollar firms with clever accountants, and other wealth-concentrators who don’t look anything like a mom-and-pop retailer or local manufacturing outfit.
But while exploiting the emotional cache of the phrase “small business” is a long-running verbal swindle in small-government circles, Trump’s use of it in the current context is oddly innovative.
The headline takeaway from Monday’s speech was supposed to be that Trump was dropping his call for a 25 percent top income tax rate and instead promising to go no lower than 33 percent. His new position would generate significantly more revenue from the wealthiest Americans that could then be spent on programs to benefit everyone.
Except that it wouldn’t, because he’s building an escape hatch into the plan. Rather than wresting more money from the most successful to fund national priorities, he would quietly usher those same people out a shiny new side door in the tax code — not only upholding existing inequalities in the U.S. economy, but making it harder for the government to invest in lifting up the disadvantaged, hiring people to repair the nation’s infrastructure, and funding the systems that will determine America’s ability to compete in the future.