Understanding the Giveaways to Wealthy Donors in the GOP Tax Proposals
Three giveaways stand out: the alternative minimum tax repeal, the estate tax repeal and the reduced rates for pass through incomes. Repealing the alternative minimum tax costs $440 billion over the next decade. Repeal of the estate and gifts tax adds an additional $239 billion to the deficit over the first ten years and $443 billion over the next decade. The pass through tax rate of 25% costs $770 billion. All are designed to help President Trump, his donors and friends and his family members. Let’s discuss them in reverse order.
Subchapter S corporations and other pass through legal entities were authorized and created to avoid double taxation for small business owners. The typical business pays a corporate income tax, and its employees pay personal income taxes, and its shareholders pay income taxes on their dividends and stock sales. A Subchapter S corporation pays no corporate income tax on their corporate profits, but the entity’s corporate profits are taxed to the individual owner at the personal income tax rates. So if it's a highly profitable Subchapter S corporation, its owner pays at the top 39% individual income tax rate, rather than the top corporate income tax rate of 35% plus the top individual income tax rate of 39%; that’s the tax advantage of these entities as they currently stand. The GOP tax proposal is that the owners of these highly profitable Subchapter S corporations be taxed at the new reduced 20% tax rate for corporations. The Trump Organization is set up as a pass through corporation owned by President Trump so his tax rate on his corporate income will be reduced to 20% if in fact he pays any income taxes at all on his corporate profits. Do not make the common mistake of thinking that all these pass-through corporations are struggling small businesses; some are and they merit favorable tax treatment; some are giant corporations, like those owned by the Koch Brothers and President Trump and many others; the GOP proposal for them is just another new means of tax avoidance.
The estate tax on inheritances currently begins at $5.5 million for an individual and $11 million for a couple. The estate tax is rarely applicable as many families pass their wealth through trusts that are frequently generation skipping – i.e. you leave your inheritance to your children for their use during their lifetimes and then the estate passes in full to your grand children. The tax rate where applicable is 40%; there are lots of loopholes and exemptions used by those with estate planners. Approximately 0.2% of estates pay the inheritance tax (death tax by the proponents of its repeal). The House eliminates it, and the Senate doubles the exemption. Elimination of the estate tax would allow President Trump and his wife to pass on his entire estate to the children tax-free. Many of the GOP’s biggest donors will benefit dramatically from this change. The estate tax has been in place since 1916, its repeal will return us to the era of great inherited wealth at the time of the Robber Barons during the Gilded Age.
The alternative minimum tax (AMT) typically applies to the very wealthy who take lots of deductions to reduce their taxes to near zero. Think Mitt Romney’s tax returns from the 2012 election or Donald Trump’s 2005 tax return, which was leaked during the last campaign. The AMT applies only to incomes over $250,000 annually. Repeal of the AMT has been a high priority for the Koch Brothers, the Mercer’s and Candidate, now President, Trump.
The cost of these three provisions alone to the American taxpayer is $1.449 trillion over the next decade. Keep that in mind when you hear the GOP explain why they are eliminating your state and local tax deduction or your mortgage expense deduction or your medical expense deduction or why they are taxing the tuitions of graduate students as income or eliminating your deduction for the next set of catastrophic fires and earthquakes. A better name for these three aspects of the GOP tax proposal is “shift and shaft”.
Less than one more year before you’ll have your chance to vote these dishonest and deceptive individuals out of office.
Prepared by: Lucien Wulsin
Dated: 11/21/17