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Donald Trump tax changes for small businesses raise concerns over benefits for wealthy

Smart Company logo Smart Company 29/09/2017 Martin Kovacs

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US President Donald Trump is targeting a tax overhaul, however, the release of the long-awaited tax plan’s details has been met with criticism that tax cuts for small businesses could favour the wealthy.

As part of the tax reform, Trump will see to slash the tax rate paid by corporations from 35% to 20%, while smaller businesses that pay a “pass-through” tax on the profits from partnerships and sole proprietorships will see their tax rate cut from 39.6% to 25%.

Trump’s tax plan also proposes to create three brackets for personal income tax, of 12%, 25% and 35%; impose a “surcharge” on the very wealthy; and double the standard deduction for income tax returns. Meanwhile, large US-based multinationals may be granted a “tax holiday” on the profits they make offshore.

The White House says the “dramatic tax cut” is designed to “boost to millions of American businesses and farms”.

Meanwhile, Trump has taken to his social media platform of choice, Twitter, to spruik the plan.

So, how has the plan been received?

A fact check conducted by The New York Times notes that “several misleading and false claims” were used to bolster the framework for the overhaul.

While lack of details in the plan make estimations of how the cuts would be distributed across income levels difficult, Trump and the wealthy would “almost certainly benefit”, the Times quoted Roberton Williams, an analyst at the Tax Policy Center, as stating.

US President Donald Trump. © Nicholas Kamm/AFP Photo US President Donald Trump. A lot of contention lies around a proposed cut to the “pass-through” tax rate, which could deliver small business savings, but also benefit the wealthy.

Inc.reports that the plan potentially paves the way for wealthy individuals to incorporate as pass-through businesses, taking advantage of the tax savings.

The pass-through rate applies to non-public businesses that don’t pay income taxes, with profits instead passing through to the owner, who pays taxes on them at an individual tax rate; Inc reports approximately 95% of the businesses in the US structured as pass-through companies.

While many of those businesses stand to benefit, Reuters reports the proposal “could also mean a windfall for partners in private-equity, venture-capital and hedge funds, unless Congress can figure out a way to block them from taking advantage of the new rate”.

Frank Clemente, executive director of liberal advocacy group Americans for Tax Fairness, told Reuters the idea a lower pass-through tax rate only helping small business is “simply a hoax”.

“There has always been talk of how to carve out ‘good’ pass-through income from ‘bad’ pass-through income,” Reuters reported Seth Hanlon, with liberal group the Center for American Progress, as stating.

“The problem is it’s exceedingly hard to do and there is no way to draw clear lines that won’t be manipulated.”

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