It's no secret that President Donald Trump takes pride in his gift for leaving people guessing. Take, for instance, his proposal to cut taxes for pass-through businesses to 15 percent. He pitched it last year as part of his campaign, but then in the fall it was gone — and then it was back, if only when he was talking to small business groups.
Now it really is back, as part of the tax cut plan the White House unveiled on Wednesday, but with the same question it raised when it first appeared last year: how many business owners will actually get a tax cut? And the answer seems to be the same. Many, perhaps a majority, will not. And it's possible some could actually face an increase.
Currently, about 29 percent of taxpayers reporting business income on their personal taxes fall in the 15 percent tax bracket — meaning they're already paying 15 percent on their business profits — according to an estimate by the Tax Policy Center. Another 38 percent of taxpayers are in brackets below 15 percent — either 10 percent, or zero, because they're reported a loss.
Ah, but the administration also plans to consolidate the seven individual tax brackets into just three, at 35 percent, 25 percent, and 10 percent — wouldn't that mean that those now in the 15 percent bracket would find themselves paying 10 percent in the new regime?
Well, that's hard to say. The administration hasn't worked out many — or perhaps any — of the details: what the White House has formulated fits onto a one-page summary. So we don't know yet where the administration would draw the bracket boundaries. Moreover, the administration promises a larger standard deduction for individual taxpayers but at the expense of almost every itemized deductions. Meanwhile, for businesses, Wednesday's proposal promises to "eliminate tax breaks for special interests," without indicating which deductions. Taken together, it surely seems possible that business owners could find themselves paying a lower rate on more taxable income. Indeed, on Thursday, Treasury Secretary Steve Mnuchin acknowledged to George Stephanopoulos of ABC News that he "can't make any guarantees" that middle-class families won't wind up paying more under the Trump plan.
Meanwhile, as with candidate Trump's original proposal, it isn't clear whether the 15 percent business tax rate is a maximum rate (so that people in the 10 percent bracket would pay 10 percent on their pass-through income), or simply the rate that everyone pays. By contrast, House Republicans, in their June 2016 blueprint for tax reform, said explicitly that that the 25 percent rate on pass-throughs that they proposed was in fact merely the top rate.
The White House didn't respond to repeated requests to clarify this point. I asked a spokesperson for the Republican bloc on the House Ways and Means Committee, which writes tax law, how they interpret the Trump proposal, but she didn't immediately respond, either. Roberton Williams, a fellow at the Tax Policy Center, said he would interpret the proposal as a maximum rate. "People in lower brackets would still get to use their lower rate," he said. "I can’t imagine it being anything else."
But he added, "We’re scratching our heads trying to figure out the many missing details of the tax plan. We’re not sure that there are any — the plan just doesn’t seem ready for prime time."
Either way, this is not a proposal that will benefit many small businesses. But as Catherine Rampell and many others have pointed out, doctors, lawyers, hedge funds, and real estate developers should do quite well.
