Investment managers would pay higher taxes on the “carried interest” that makes up much of their income under Donald Trump’s tax plan, said Wilbur Ross, the billionaire distressed-debt investor and Trump supporter.

Saying he wanted to clear up confusion over the Republican nominee’s plan, Ross said Trump would tax carried interest -- that is, the portion of an investment fund’s returns that are paid to investment managers -- as ordinary income. Moreover, Ross said, that plan will not be affected by another Trump proposal that offers a tax-rate cut to income from partnerships, the structure that many investment funds use.

“My carried interest, and everyone else’s, will not be eligible” for that lower tax rate, said Ross, the chairman of WL Ross & Co. Ross represented Trump’s campaign at a tax-policy forum organized Thursday by the Washington-based Tax Policy Foundation. Ross and economist Peter Navarro sought to defend and clarify Trump’s proposals; Gene Sperling, a former White House economist, represented Democrat Hillary Clinton’s campaign.

Under current law, partnerships, limited liability companies and other businesses organized as so-called “pass-through entities” don’t pay income taxes themselves. They pass their earnings to their owners, who are then taxed at their individual tax rates. Trump proposes letting those businesses pay a 15 percent rate on their income. Owners of large pass-through businesses would then pay a 20 percent tax rate on any distributions they receive.

The campaign hasn’t defined what would constitute large or small businesses under its proposal.

The pass-through plan had appeared to conflict with another Trump promise -- to tax carried interest as ordinary income. Currently, carried interest is taxed as capital gains, at rates as low as 23.8 percent -- far below the current top income-tax rate of 39.6 percent. Clinton has also proposed taxing carried interest as ordinary income.
Sperling, representing Clinton, said investment managers would be able to figure out how to qualify for the 15 percent rate Trump proposes.

“I don’t care what he whispers to Wilbur Ross; I don’t care what he whispers to anyone,” Sperling said. “There’s no way you can devise a tax system where the people getting carried interest can’t figure out how to take their current 23.8 to 15.”

Carried Interest

Because many investment firms are organized as pass-throughs, independent policy analysts have said they might qualify for the 15 percent rate that Trump proposes. Ross said that won’t happen. Instead, the 15 percent rate is intended to benefit small businesses, he said. Investment managers would pay more than they already do under Trump’s plan, he said.

“The intent, clearly, is that no taxpayer -- other than those with carried interest -- will be disadvantaged,” Ross said.

Ross also addressed another potential complication in Trump’s plan -- that the 15 percent rate for pass-through businesses might prompt workers to turn themselves into “self-employed” contractors without leaving their current employer in order to get the lower rate. Trump doesn’t intend to allow that to happen, he said.

Moderator David Wessel, the director of the Hutchins Center on Fiscal and Monetary Policy, asked whether new regulations and enforcement would be needed to prevent people from trying that strategy.

“If all the people in Washington, all the lawyers and tax professors can’t figure out how to draft something, they ought to quit,” Ross said.

The Tax Policy Center, which is a joint venture of the Urban Institute and the Brookings Institution, this week released updated analyses of both candidates’ tax plans. It found that Clinton’s plan, which proposes various tax increases on high-earning individuals and some businesses, would raise about $1.4 trillion over 10 years. Trump’s plan, which proposes tax cuts for businesses and individuals, would decrease federal revenue by $6.2 trillion over that period.

Navarro, an economics professor at the University of California Irvine who is advising Trump’s campaign, criticized the center’s analyses because it didn’t account for the effects of changes in economic behavior that would result from the proposed policy changes. That approach, called “dynamic scoring,” is controversial among economists, who disagree on how to build economic modeling for it.

‘Politics, Politics’

“Politics, politics, politics,” said Navarro, who called the tax-policy center “a left-leaning center that produces analyses that favor Democratic taxes and programs.”

Len Burman, the tax-policy group’s director, said it plans to release studies that will consider such “macro-economic effects within the next few days.”

Another study, by the conservative Tax Foundation, used dynamic scoring to determine that Trump’s tax proposals would reduce federal revenue by $2.6 trillion to $3.9 trillion over a decade, even after generating as many as 1.8 million new jobs. The Tax Foundation also found that, on a dynamic basis, Clinton’s plan would increase federal revenue by $663 billion over 10 years, though it would lead to 697,000 fewer jobs in the long run.

Sperling said the Tax Foundation’s model of Trump’s plan was too generous, resulting in a finding that “allows people to think they can drink chocolate malts and lose weight at the same time.” A more responsible approach to dynamic scoring “might affect 5, 10, 15 percent” of the plan’s static cost, he said.

Trump has pitched his plan as a tax cut that will benefit middle-class taxpayers, but analyses have found that it would benefit those at the top of the income scale far more. Trump proposes to consolidate the existing seven individual income tax rates to just three, while cutting the rates across the board. The top rate would go from 39.6 percent to 33 percent.

Trump would more than double the standard deduction -- a benefit for the middle class, who are less likely to itemize deductions. But other changes he proposes -- repealing “head of household” filing status and personal exemptions -- would mean higher taxes for large families and single parents, according to an analysis by Lily Batchelder, a New York University law professor.

A married couple with three children making $50,000 a year would “face a tax increase of $450,” Batchelder wrote, and a single parent making $75,000 with two school-aged children and no child-care costs “would face tax increase of $2,440.”

While the Trump campaign labeled her analysis “pure fiction,” an economist at the right-leaning Tax Foundation has said “the results seem reasonable to me.”

Batchelder, a former tax specialist for President Barack Obama’s administration and the Senate Finance Committee, appeared at the Washington forum and asked Ross about her findings.

“You are incorrect that it raises taxes on the little people,” Ross responded. “There is no hardship on the people in the lower brackets.” But he also said that “there are some people at the margins that could be disadvantaged” and that Trump’s campaign will work with Congress to prevent that.

This article was provided by Bloomberg News.