The rich will get richer: Two tax reform provisions shovel money to millionaires

Remember during the presidential campaign last year when Donald Trump boasted that we should elect him because he knew all about the ways rich people avoid taxes? Trump suggested that his knowledge of the ins and outs of the tax codes made him uniquely qualified to look out for the average Joe when it came time for tax reform.

 

Well, the Republican tax plan is out. House Speaker Paul Ryan has been making the rounds of the talk shows earnestly explaining how this plan is “aimed at people who live from paycheck to paycheck.” Which makes me wonder if Paul Ryan and Trump read their own legislation, because on close examination, this plan is an embarrassing giveaway to the richest Americans, people very much like …. Donald Trump.

Two specific provisions are particularly egregious because they benefit primarily the very rich and together will cost the U.S. Treasury well over a trillion dollars over the next decade. That’s trillion with a “T”!

The first is a provision that lowers the top rate on “pass through” business income. This is income from business claimed on individual tax returns — income that “passes through” to owners and is taxed at their individual rate. The top rate for individuals is 39.6 percent. The Republican tax plan reduces that rate to 25 percent for pass-through business income. This is touted as tax relief for struggling small businesses. It’s actually a boondoggle that mainly benefits the wealthy, since the vast majority (86 percent) of business filers already pay the lower 25 percent rate.

According to the Tax Policy Center (TPC), this single change will cost the federal government in excess of $770 billion over 10 years. And where will that $770 billion end up? According to the TPC, 80 percent of it will go into the pockets of people with annual household incomes over $1 million.

And that’s not all. The TPC estimates that the U.S. Treasury will lose tens of billions more because this change incentivizes people to game the system by reclassifying their income to avoid taxes. That is exactly what happened in Kansas, which exempted “pass through” income from its state income tax in 2012.

According the Center on Budget and Policy Priorities, after Kansas passed this exemption, thousands of salaried individuals reorganized themselves as “pass throughs” to avoid state income taxes. This so-called “LLC loophole” blew a hole in Kansas’ state budget, costing the state $472 million in 2014 alone. It was finally repealed this year, but only after years of enormous budget deficits, severe cutbacks to education and other state services, and a rate of economic growth that lagged far behind the rest of the country.

The second budget busting give-away in the Republican tax plan is the repeal of the Alternative Minimum Tax. This is a 40-year-old provision of the tax code that targets wealthy people who’ve avoided paying their fair share of taxes due to creative accounting. Many people learned about this tax when Trump’s 2005 tax return was released last year.

Trump’s 2005 tax return is a classic example of why we need an Alternative Minimum Tax. That year, he reported $150 million in income. He paid $38 million in federal taxes, of which $31 million was due to the Alternative Minimum tax. That means, without the Alternative Minimum Tax, Trump would have paid only $7 million in taxes on $150 million. That’s an effective tax rate of less than 5 percent. No wonder he wants to get rid of it! According to Marketwatch, the price tag for repealing the Alternative Minimum Tax is $695 billion over 10 years.

There are many provisions in this tax reform legislation and there are probably even some good ones. Problem is, the overall effect of over a trillion dollars in tax “relief” is for people who don’t need it. If these two particular provisions are included in the bill that passes, the end result will be massive budget deficits and less money for things like disaster relief, healthcare, infrastructure, and education, to name a few.

Perhaps this misbegotten, tone-deaf legislation is the inevitable result of a process where laws are formulated in secret by folks who seem more beholden to their donors than to the people who actually elected them. If so, it is time to remind our elected representatives who it is they work for. If we don’t, then the government we have will truly be “of the donor, by the donor and for the donor.”


• David Ottoson is a Juneau resident and business owner. My Turns and Letters to the Editor represent the view of the author, not the view of the Juneau Empire.


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