High-income Wall Street financiers could be unintended winners from a section of U.S. President Donald Trump’s tax-cut plan that is meant to help mostly small, “mom-and-pop” businesses.
Trump called on Wednesday for a new “pass-through” tax rate of 25 percent that could mean big savings for owners of sole proprietorships and partnerships who now pay 39.6 percent.
But it 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.
Ron Wyden, top Democrat on the tax-writing Senate Finance Committee, said Democrats supported a pass-through rate for small businesses, such as “a cleaner, a garage, a restaurant.”
He said Trump’s plan, however, would create “a whole new set of wealthy individuals being able to dodge their taxes through this new provision.”
At issue is the taxation of the roughly 95 percent of American businesses that are not public corporations.
Non-public pass-through businesses, such as sole proprietorships, limited liability companies and partnerships, pay no income tax themselves. Instead their profits “pass through” directly to their owners, who pay tax on them at the individual tax rates.
A small fraction of those business owners pay the top individual tax rate of 39.6 percent, higher than the current top corporate income tax rate of 35 percent.
Those business owners have long complained that the disparity is unfair, especially in view of the fact that many multinationals pay much less than the 35 percent statutory corporate tax rate by exploiting abundant loopholes and tax breaks available to large, global corporations.
Republicans have been eager to address the issue. Trump’s plan proposes a new tax rate of 25 percent for the pass-through income of “small and family-owned businesses.”
The problem, according to the plan’s critics, is that financial entities such as private-equity, venture capital and hedge funds are all partnerships whose wealthy partners would see substantial tax savings on large portions of their income unless congressional tax writers find a way to exclude them.