One of Trump’s boldest proposals would change tax rules for partnerships, limited liability companies, sole proprietorships and other so-called “pass-through” business entities. Under current law, businesses organized as pass-throughs -- which include small businesses as well as private-equity firms and hedge funds -- don’t pay income taxes themselves. They pass their earnings to their owners, who then pay tax at their individual income-tax rates.
Because the current top individual rate is 39.6 percent, Trump’s initial proposal would have represented a major savings for high-income pass-throughs. Last month, his advisers changed the proposal: Pass-through businesses would be able to choose to pay the 15 percent rate -- if they retained their earnings instead of passing them through to owners. In assessing Trump’s plan, the Tax Policy Center’s economists assumed that owners would pay capital gains taxes on any distributions they received from their businesses -- though owners of small businesses would be exempt from that requirement.
Trump’s official website last month briefly posted an explanation that said, “small business owners who elect to be taxed under the 15 percent business tax rate will not face double taxation” -- language that appears to be aimed at exempting them from paying a 20 percent tax rate on distributed profit. But the statement was quickly removed from the website, and the campaign has never defined what it meant by “small.”
‘Clear Guidance’
Trump’s campaign has yet to “provide clear guidance” on the plan, according to the center’s report. For its analysis, the center assumed that businesses making less than $500,000 a year would qualify for the exemption from taxes on distributed earnings.
Trump also proposes to collapse the current seven individual income-tax brackets to three: 12 percent, 25 percent and 33 percent. “The 18 percentage point differential between the top rate on pass-through business income and wages would create a strong incentive for many wage earners” to seek the lower rate, the report said.
Top 1 Percent
On Clinton, the center’s analysis found that the top 1 percent of households, by income, would pay more than 90 percent of the tax increases that she has proposed. Those include a applying a 4 percent surcharge on incomes higher than $5 million; requiring a minimum tax rate of 30 percent on incomes of $2 million or more; and limiting the tax benefit of many tax deductions.
On average, filers in the bottom 80 percent of the national income distribution would see an increase in their after-tax income of less than 0.8 percent under her plan, the center found. The average benefit for the bottom four-fifths of taxpayers would be no more than $140.
In the first year under her tax plan, the top 1 percent would pay additional federal taxes of $117,760, on average, and the top 0.1 percent would pay $805,250 more, on average, according to the report.