New ‘Trump Loophole’ Would Cost $1 Trillion In Lost Federal Revenue Over Ten Years

Republican presidential candidate Donald Trump’s proposal to slash the tax rate on so-called business “pass-through” entities would lose almost $1 trillion in federal revenue over 10 years, according to a recent analysis by a non-partisan think tank. Trump would personally benefit handsomely from this proposal because he appears to derive most of his income from about 500 pass-through entities.

“Once again, we see whose interests Donald Trump would represent if he is elected,” said Americans for Tax Fairness Action Fund Executive Director Frank Clemente. “His huge tax cut for ‘pass through’ entities would cost the American people a trillion dollars in order to benefit the owners of big real estate firms and Wall Street investors, with himself at the front of the line. Instead of paying his fair share to invest in America, Trump is choosing to slash the taxes owed by extremely wealthy people like himself.”

Trump’s plan would slash the top tax rate paid by the owners of pass-through entities from as high as 39.6% to just 15%. The profits of such entities—which include S corporations, partnerships and LLC’s—pass directly through to the owners, avoiding any corporate-level tax, and are taxed at individual income tax rates.

The Tax Policy Center (TPC) estimated that Trump’s proposal to cut the pass-through income tax rate to 15% would cost $997 billion over 10 years. [See Table 3, fifth line item: “Tax business income at preferential rates”] The revenue loss is likely to be much higher because the TPC estimate was based on Trump’s original tax plan released in 2015 where he proposed a top personal income tax rate of 25%. In his latest plan Trump proposes a top tax rate of 33%. The higher the tax rate on personal income the greater the incentive for wage earners to become independent contractors, in order to be taxed at the much lower 15% pass-through business rate.

Trump is the sole or principal owner of approximately 500 pass-through entities, organized as sole proprietorships and/or closely held partnerships, according to his tax counsel. That means Trump will personally benefit from a massive tax giveaway that’s been appropriately dubbed the “Trump Loophole.”  

A recent study by the Center for American Progress found that 70% of partnership and S corporation revenue goes to the wealthiest 1% of households. The study determined that big pass-through businesses already dodge hundreds of billions of dollars in U.S. taxes.

Pass-through structures, like S corporations and partnerships, are meant to simplify tax filing for small businesses. And while most pass-throughs are small, an unprecedented number of big businesses are converting to pass-through status to avoid taxes. As a result, today most pass-through income now goes to the wealthy owners of these large entities, such as Wall Street private equity managers and huge law firms and real estate firms.

“Donald Trump’s willingness to give away $1 trillion in public revenue is remarkable and needs to be put in perspective,” said Clemente. “With just 80% of that revenue we could make huge investments in American workers, families and communities.” Among the potential public investments Clemente cited:

  • Doubling federal highway and mass transit spending each of the next seven years ($470 billion);
  • Providing high-quality child care to all eligible low-income children under age 4 by 2026 so that parents can work, attend school, or participate in training ($82 billion);
  • Providing high-quality preschool for all low- and moderate-income four-year-olds for 10 years ($75 billion);
  • Offering two years of free tuition at community college over 10 years benefitting up to 9 million students ($61 billion);
  • Expanding the Earned Income Tax Credit to include childless workers and non-custodial parents for 10 years ($67 billion); and
  • Increasing the National Cancer Institute’s budget by 50% for 10 years ($27 billion).

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