By Sahil Kapur
(Bloomberg) --Despite President Donald Trump’s statement this month that “the rich will not be gaining at all,” the tax plan that the White House and Republican leaders rolled out may contain more than $1 trillion in breaks for the highest earners and the wealthy -- at least without revenue offsets that remain largely unspecified.
“This is a huge tax cut for the top 1 percent,” Leonard Burman, director of the Urban-Brookings Tax Policy Center, said Wednesday after details of the plan emerged. “Impossible to square with the president’s rhetoric.”
The tax framework sets up some suspense over where Congress will set the top individual income-tax rate -- giving lawmakers flexibility to set it higher than the 35 percent mentioned in the document. But another provision, which would slash the rate paid by owners of partnerships and limited-liability companies, is seen as a potential bonanza for people at the top of the income scale.
The framework calls for capping the tax rate on such pass-through businesses at 25 percent. Businesses organized that way don’t pay income tax themselves, instead passing earnings to their owners, who pay at their individual rates. Owners with high business incomes, who currently face a top rate of 39.6 percent, are in for major tax relief, policy analysts said.
In describing the newly proposed tax rate, the framework cites its impact on “small and family-owned businesses,” but pass-through entities range from mom-and-pop grocers to major, closely held businesses, including Trump’s companies.
The tax plan is “not good for me,” Trump said Wednesday during a speech in Indianapolis to rally support. “Believe me.”
Various provisions in the framework “would cut taxes more for the top than other taxpayers,” said Kyle Pomerleau, director of federal projects at the Tax Foundation, a Washington policy group. But “the biggest driver is the special rate for pass-through businesses,” he said.
With that provision, it “would be very hard to offset a tax cut” with the ideas that Republicans have put on the table in recent discussions, he said.
The Trump administration is emphasizing the possibility that Congress will create a high top rate on ordinary income. That’s one way to fulfill Trump’s goal, a White House official said Wednesday, asking not to be identified because the discussions have been private.
Wealth managers, family offices and estate lawyers said the lower rate for pass-through businesses would be a major boon for their clients.
"From the ultra-high net worth perspective, this could be extremely favorable," said Michael Cole, president of U.S. Bancorp’s Ascent Private Capital Management, which represents more than 130 wealthy families. Those clients also may stand to benefit from the elimination of the estate tax (projected to cost about t $269 billion over 10 years) and Alternative Minimum Tax (costing about $800 billion).
But the lack of detail is raising as many questions as answers. Dismantling the estate tax may not be as good as it sounds if it’s accompanied by higher capital gains taxes. “There are so many moving parts it’s hard to figure out what’s going to happen," said Robert Elliott, vice chairman of Market Street Trust Co., a multi-family office in Corning, New York.
The tax treatment of individual capital gains isn’t mentioned in the framework. And there’s plenty of skepticism about whether Congress will even be able to agree on an overhaul.
"Wealthy families know that these are just proposals and that a great deal of horse trading will be necessary before any of them gain traction," said Kathleen Fisher, head of wealth and investment strategies at AllianceBernstein.
Until there’s greater clarity, most advisers are refraining from recommending wholesale changes in estate structures or tax-planning strategies for clients. "The devil is always in the details and we don’t have those yet," said Toby Johnston, a partner at Moss Adams.
The framework calls for setting up three individual income tax rates, topping out at 35 percent instead of the current 39.6 percent. But it gives Congress the option to create a fourth rate that would apply only to the highest earners. One Republican member of the tax-writing Ways and Means Committee, who asked not to be identified, expressed confidence that the panel will support the additional bracket.
The document is silent on one issue Trump highlighted during his campaign: ending the carried-interest tax break for investment managers. Carried interest is the portion of an investment fund return that’s paid to managers. Currently, it’s taxed as capital gains, at rates as low as 20 percent. Trump had called for eliminating the break for hedge-fund managers -- though it’s unclear whether that goal would have applied to other types of investment funds.
The White House official said there isn’t consensus about what to do on carried interest, while Trump continues to support its elimination.
The framework calls for a tax code that is “at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.” How that will be achieved remains unclear.
Treasury Secretary Steven Mnuchin has said repeatedly that the tax framework will end certain benefits, such as deductions and other perks, for high earners, lessening their benefit from lower tax rates.
Republicans describe the document as a guidepost for tax-writing committees to begin crafting legislation. It contains two specific changes designed to benefit the middle class -- doubling the standard deduction to about $12,000 per person and an expanded child tax credit.
“This is our best opportunity in a generation to deliver real middle-class tax relief, create jobs here at home, and fuel unprecedented economic growth,” House Speaker Paul Ryan said in a statement.
The House and Senate will probably pass separate proposals that will have to be reconciled into a single bill later, said Senator Pat Toomey, a Pennsylvania Republican. The final legislation will go after tax deductions and loopholes and it’s not clear whether the wealthy will get a net tax cut, he said.
“My preference is there not be a tax increase for anyone,” Toomey said Tuesday. “But with regard to very high income individuals I don’t think we can guarantee that yet.”
House Freedom Caucus Chairman Mark Meadows said “it’s important to lower the rates for everyone.” But cutting the top individual rate, he said, is not a “red line” that will scuttle his support.
Democrats are describing the plan as a broken promise.
Senator Bernie Sanders of Vermont, who lost the 2016 Democratic presidential nomination to Hillary Clinton, called the Trump tax plan “morally repugnant” for “providing hundreds of billions in tax breaks to the wealthiest people.”
“‘This is a complete violation of the president’s pledge that the rich wouldn’t benefit at all from his tax plan,” said Senator Ron Wyden of Oregon, the top Democrat on the tax-writing Finance Committee.
--With assistance from Tom Metcalf, Katya Kazakina, Brendan Coffey, Devon Pendleton and Simone Foxman.To contact the reporter on this story: Sahil Kapur in Washington at [email protected] To contact the editors responsible for this story: John Voskuhl at [email protected] Peter Eichenbaum, Alexis Leondis