The Republican tax bill picks winners and losers across the income scale, including among millionaires. It is good news for people like President Donald Trump but bad news for professional athletes.
The bill delivers large breaks to high-earning owners of certain businesses, known as pass-through entities, which comprise most of Trump’s business empire, and to heirs of large estates, such as Trump’s children. “Passive owners” of businesses like real estate partnerships and hedge funds or even a local landscaping service, the example that Republicans pointed to when unveiling the plan last week,would enjoy the largest tax cut of all individual taxpayers under the bill. In part, that’s because the legislative text includes a carve-out allowing these earners to maintain their state and local income tax deduction — a valuable benefit that all other individual taxpayers could lose under the bill.
By contrast, millionaires who earn money solely from their high-salaried employment — such as professional athletes — would see their taxes go up if the bill becomes law, because of a steep increase in their personal tax rates.
Members of the House Ways and Means Committee met Monday to begin officially debating the bill, a process that is expected to last several days as lawmakers seek to change various aspects of the sweeping legislation. On Monday, House Ways and Means Committee Chairman Kevin Brady of Texas unveiled an amendment that would restrict a tax break for hedge funds, private equity firms and other investment managers.
The carried interest provision allows income earned by fund managers and others to be taxed at a lower capital gains rate, rather than as ordinary income. Brady’s amendment would require investors such as hedge fund managers and real estate developers to hold on to assets for a period of three years to qualify for the lower capital gains rate on their income.
As drafted, the bill would raise taxes on an executive in one of Trump’s companies who is paid solely through a seven-figured salary, while reducing taxes on Trump himself. Put another way, it would likely cut the taxes paid by Robert Kraft, owner of football’s New England Patriots, while likely raising taxes on Tom Brady, the team’s quarterback.
However, Brady would likely benefit from the bill, to some extent, through his pass-through business TB12 LLC, which sells nutritional supplements online and operates a sports therapy center at the Patriots’ practice facility.
Trump often says — sometimes quoting a directive given to him by Kraft — that he wants to cut taxes for the middle class, not for high earners. “The Democrats will say our tax bill is for the rich,” Trump said last week, “but they know it’s not.”
Early analyses of the bill do not support that claim. Several, including analyses from Congress’ Joint Committee on Taxation and the independent Tax Foundation, find that America’s highest earners would, as a group, receive at least twice the tax cut that middle-class workers would get, as a percentage of their income.
The independent Institute on Taxation and Economic Policy said Monday that the top 1 percent of income earners, those who make just under $500,000 a year or more, would receive nearly half the bill’s tax benefits a decade from now. That group of taxpayers would consistently see income gains from the bill, and those gains would grow from 2.4 percent in 2018 to 2.5 percent in 2027, the institute said. Every other income group would see its percentage gains dwindle over time as a result of changes the bill makes to inflation calculations for certain tax benefits, and the fact that a middle-class tax credit it creates would expire after five years.
Still, the bill does not treat all top 1 percenters equally. An analysis using the economic modeling software TaxBrain suggests that a quarter of tax filers earning $1 million or more would see their taxes go up next year if the bill becomes law. No other income group would initially see that high a share of tax filers with tax increases.
The House bill mixes steep reductions in business tax rates with a blend of rate cuts and loophole closures on the personal side, producing a mixed bag for taxpayers up and down the income spectrum, but delivering the largest gains, in dollar and percentage terms, at the top.
“While every income group sees a benefit on average under this plan, high-income filers get the most relief, particularly those making above $1 million,” said Ernie Tedeschi, an economist at Evercore ISI, who has modeled the effects of the proposal. “That’s true even before taking into account the impact of the corporate tax cuts.”
Tedeschi said those results were intuitive, given the nature of the bill, which includes the repeal of the Alternative Minimum Tax and the reduction in rates for pass-through income to 25 percent from the top 39.6-percent rate now. That will amount to a large cut for many wealthy business owners.
High-income taxpayers who earn “labor income” — money paid for work — would not fare as well. The bill eliminates many deductions popular with higher-income taxpayers, including those for state and local income taxes paid. It would also cap at $500,000 the amount of new mortgage debt on which interest could be deducted, down from $1 million. And those high-earners are stuck with the top personal income tax rate of 39.6 percent — though the threshold for paying it rises to $500,000, from $418,000 today, for individuals and $1 million, up from $471,000 today, for couples.
The bill also effectively increases that top rate even further by preventing those taxpayers from taking advantage of lower marginal rates along the income scale, a benefit that all other taxpayers enjoy. The bill proposes three individual income tax brackets: 12 percent for married couples earning up to $90,000; 25 percent for those earning up to $260,000 and 35 percent for those earning up to $1 million. A couple earning $350,000 would pay 12 percent on the first $90,000 of that income, 25 percent on the next $170,000 and 35 percent on the remaining $90,000. Those earning more than $1 million would gradually lose the benefits of the 12 percent bracket as their incomes rose.
Those changes serve to raise taxes on high-salaried employees who earn all their money through labor income. (Relatively low rates for investment income such as capital gains and dividends are left unchanged.) High-earning business owners, though, are largely shielded and in fact see substantial tax cuts on average, a distinction Republicans touted in their talking points when releasing the bill.
“Our legislation will ensure this much-needed tax relief goes to the local job creators it’s designed to help,” Republican leaders said in the talking points. That would be achieved “by distinguishing between the individual wage income of NBA All-Star Stephen Curry and the pass-through business income of Steve’s Bike Shop.”
Pass-through owners benefit from the reduced top rate on their income, to 25 percent from 39.6 percent. Some benefit more than others; passive owners, who do not work in their businesses, see all their profits qualify for that lower rate. For active owners, who both work in their businesses and own them, the lower rate would apply to 30 percent of their profit income, while 70 percent was taxed at individual rates, unless the owners sought to have a different formula used.
Another provision in the bill, spotted by a team of New York University tax law experts Sunday, appears to allow pass-through owners to continue deducting their state and local income taxes paid. A Ways and Means spokesman confirmed Monday that such owners “will continue to be able to deduct state and local taxes incurred in the conduct of a trade or business.”
The NYU professors criticized the provision. “Employees paying state and local taxes on their wages would get their deduction denied, while still allowing owners of companies like partners in private equity or law firms or Donald Trump himself to continue to deduct their state and local income taxes,” said David Kamin, an NYU law school professor who worked on tax policy in the Obama administration. “That would be deeply inequitable.”