Miller described a technique in which an entity that manages an investment fund is set up as a limited partnership, in which the general partner overseeing the fund owns a tiny stake, typically 0.1 percent. Generally, limited partners, who aren’t currently subject to the self-employment tax, hold the remaining 99.9 percent interest -- allowing the individual owners of the fund manager to skirt the tax.
The proposals reflect that a growing portion of America’s business income is generated through structures other than the traditional C corporations -- the familiar form of a publicly traded company, like General Electric Co., which pays corporate income tax.
Targeting Pass-Throughs
So-called pass-throughs, which range from mom-and-pop businesses to giant funds, aren’t subject to income taxes and pass profit down to investors, who are taxed. Pass-through entities such as partnerships and S-corporations now generate more than half of U.S. business income, according to a 2015 paper by the National Bureau for Economic Research. Since 1980, pass-throughs have accounted for more than half the growth in the income share of the nation’s top 1 percent of taxpayers, according to that paper.
The proposals represent “a direct shot at pass-throughs,” said Brian Reardon, president of the S Corporation Association of America, a trade group. The proposed increases would push the top overall tax rate on S corporation owners well above 40 percent, he said. C corporations pay a top statutory rate of 35 percent.
“We’re not too happy about it,” Reardon said.
Pressing Inversions
The budget also repeated Obama’s call for international tax reform -- while more than doubling the revenue his policy prescriptions are expected to raise from it to $484 billion over 10 years. One reason for the increase: “a larger number of companies that are taking advantage of what we think are loopholes that need to be closed,” said White House budget director Shaun Donovan at a briefing.
The centerpiece of that reform package, which was introduced last year, would impose a 19 percent tax on corporations’ foreign earnings -- regardless of whether they bring that money back to the U.S. Under current law, corporations can keep such earnings offshore indefinitely while deferring income taxes on them. In this year’s budget, that tax alone is projected to raise $350.4 billion over 10 years.
Donovan said the Obama administration is taking steps to curb corporate inversions, the practice of moving a U.S. company’s tax address offshore by merging with a foreign company, via executive orders and will keep pressing Congress to act as well.