In my many years of writing about tax policy, I have never seen anything quite like the ongoing affair of Donald Trump and business taxes. Since last Thursday, the Trump campaign has produced multiple and internally inconsistent explanations of how he would tax partnerships and other pass-through businesses. He has repeatedly posted descriptions of his plan on his website and, then, within hours, taken them down. And, as a final flourish, one senior staffer told Bloomberg’s Lynnley Browning that “our position never changed” on this issue.
Yet, five days after Trump described his plan, it remains impossible to know how he would tax this income. And it is not a trivial matter. One version would open the door to widespread gaming of the tax system and reduce federal revenue by at least $1 trillion over 10 years without creating much new economic activity.
To understand just how bizarre this episode has been, let’s try to recap the story.
Last year, Trump proposed taxing all business income at 15 percent and taxing wages and other non-investment income at a top rate of 25 percent.
The problem: By creating a tax rate on business income that is much lower than the rate on wages, Trump would give high-income employees a big incentive to recharacterize their income as business income instead of wages. Those who could would simply become contractors, a step that would allow them to save thousands of dollars in taxes. In December, the Tax Policy Center estimated that Trump’s proposal would reduce federal revenue by $997 billion over 10 years, assuming Congress curbed the most egregious abuses. But the revenue loss could be much bigger.
In June, House Republicans, led by Speaker Paul Ryan (R-WI), proposed taxing wages and other ordinary income at a top rate of 33 percent and “small business and pass-through income” at 25 percent. The proposal would require that a share of business income be treated as wages, and thus be subject to the higher ordinary income rate.
On August 8, Trump told the Detroit Economic Club that he was adopting the individual tax rates in the House plan while promising that “no American company will pay more than 15 percent of their business income in taxes.” Unfortunately, a 33 percent top rate on wages and a 15 percent rate on business income would make incentives to recharacterize income even greater than under his original top rate of 25 percent.
Last Thursday, Sept. 15, Trump gave another speech, this time to the New York Economic Club. And that’s when the confusion really began. In that speech, he proposed “a 15 percent business tax rate, down from the current 35 percent rate.” Trouble is, the current 35 percent rate applies only to corporations. Partnerships and other pass-throughs pay the top individual rate of 39.6 percent, not 35 percent. So would the lower rate apply to them too?
As he was giving his speech, the Trump campaign put out a fact sheet that said, “The plan lowers the corporate rate to 15 percent. The current 35 percent is the highest in the world.” Ah, said most tax geeks, he is limiting the 15 percent to only corporations—a major shift from his earlier proposal.
Normally, this is where I’d include a link to that fact sheet on Trump’s website. But I can’t--because the Trump campaign removed it after just a few hours.
The same day, it substituted one that said “The Trump plan will lower the corporate tax rate from 35 percent to 15 percent.” The summary was silent on the pass-through rate and seemed to confirm to most observers that the 15 percent rate would apply to corporations only, and not partnerships. It too was stripped from Trump’s website, though because nothing really disappears from the web, I found a link here.
After a quiet weekend, the Trump campaign issued yet another statement on Monday morning. Entitled “Trump Policy on Business Taxes,” it said, “All businesses, small and large, will be offered the 15 percent business tax rate.” Businesses could choose to pay tax at the ordinary rate (up to 33 percent) or at the corporate rate of 15 percent. If they chose the corporate rate, they’d be subject to both the firm-level and shareholder level tax. However, small businesses (which were not defined) would not be double-taxed.
There were some other details too, but it doesn’t matter because, you guessed it, that statement had also disappeared from the Trump website by mid-afternoon (Here’s a version courtesy of Bloomberg-BNA).
It is now about 3 PM on Tuesday, Sept. 20. Like you, I anxiously await the next version.
