According to press accounts, Donald Trump seems prepared to put out a tax cut proposal that could net him hundreds of millions of dollars over the next decade. It probably won't do much to help the rest of us, but folks who were worried about whether President Trump would be able to pay off his debts should be relieved.
Here's the basic story. The word is that the Trump tax plan will include two measures that will personally help Trump enormously. The first is eliminating the alternative minimum tax. This is a special tax that is put in the tax code to ensure that people are not able to use loopholes to escape their tax liability altogether. The rate for very high income people like Donald Trump is 28 percent.
The second special benefit for Mr. Trump is allowing individuals to pay the newly lowered 15 percent corporate income tax on income received through pass-through corporations. The idea of a pass-through corporation is a neat concept in itself.
The government grants the benefits of corporate status as a mechanism to promote wealth accumulation. Corporate status includes a variety of benefits, but first and foremost it gives you limited liability. This means that if you do something incredibly stupid that results in enormous harm to large numbers of people (e.g. producing a drug that leads to birth defects), the corporation is liable only to the extent it has assets. The individual shareholders are off the hook. In other words, they don't have to worry about losing their homes and their retirement accounts to cover the damage their company has inflicted on people.
In the good old days, before the focus of economic policy was giving ever more money to the rich, the quid pro quo for corporate status was paying the corporate income tax. In this sense, the corporate income tax is a completely voluntary tax. Anyone is free to organize a company as a partnership in which the owners do have personal liability, and thereby avoid the corporate income tax completely.
But we know how hard it is being rich, so Congress decided to create something called a "S-Corporation." An S-Corporation, which is also referred to as a pass-through corporation, can enjoy the legal benefit of limited liability, but avoid paying the corporate income tax. The earnings of the corporation are passed on to the owners who then pay tax on it as ordinary income, just as they would their earnings from work.
This by itself is already an enormous subsidy, but Donald Trump wants to make things really great for these rich people. He wants his 15 percent corporate tax rate to apply to the rich people who own S-Corporations. This means that, while the top marginal tax rate will ostensibly be 33 percent on the rich, those who are not too dumb to breathe will get their money through S-Corporations and pay just 15 percent.
If that sounds hard to imagine, consider the case of a highly paid medical specialist or senior lawyer earning a salary of $800,000 a year. These folks would face a marginal tax rate of 33 percent on much of their income, if they paid taxes as individuals. But if they arranged to have an S-Corporation, they could just pay a 15 percent tax rate and call it a day. Of course school teachers, firefighters and other ordinary workers would likely be paying a considerably higher income tax rate, in addition to the 12.4 percent Social Security tax they pay on their whole income.
So you can see the Trump plan is a terrific way to make America really great again for very rich people. It also will lead to tremendous job growth in the tax shelter industry, as hundreds of thousands of rich people rush to hire lawyers and accountants so that they can get all their income through pass-through corporations.
Now let's see how this works for Mr. Trump. While he has refused to release his tax returns he claims he has assets of $10 billion. Let's say that he gets a 5 percent annual return, or $500 million a year, as income. This is certainly a very modest assumption for a person with Donald Trump's business acumen.
Now, if he had to pay the 28 percent alternative minimum tax he would be paying $140 million a year in taxes. But after the Trump tax plan goes into effect, he would only have to pay $75 million in taxes. This means that the Trump tax plan will save Donald Trump $65 million a year in taxes. Trump's savings would be only a bit less than the annual wages of 4,500 minimum wage workers. Now isn't that terrific?