(Bloomberg) Donald Trump’s campaign is preparing to tweak one of his boldest tax proposals out of concern that it might lead some high-income earners to try “to scam the system,” one of the Republican presidential nominee’s economic advisers said.
Trump has proposed to tax individuals’ income from partnerships, limited liability companies and other so-called “pass-through” business entities at a 15 percent rate—down from a current top rate of 39.6 percent. That provision may get some new restrictions, said economist Stephen Moore, who has been advising Trump on tax matters.
“We are absolutely dedicated to making sure the 15 percent is for legitimate businesses,” Moore said in an interview Thursday.
The campaign has become concerned that people with high wage and salary income could attempt to reclassify their earnings as investment income and route it through a pass-through entity—cutting their tax rate, Moore said. Trump’s advisers plan to release more details about his tax proposals in two weeks, Moore said.
Democratic nominee Hillary Clinton, who was set to deliver an economic-policy speech Thursday afternoon, was preparing to label Trump’s pass-through tax provision “the Trump loophole,” according to a Clinton campaign official who asked not to be identified.
Pass-through business entities, which include partnerships, limited liability companies and S corporations, pay no corporate income tax, but pass their earnings through to their owners. The owners then pay tax at their regular income rate. Trump has disclosed an ownership interest in more than 500 firms—most of which are organized as pass-throughs. Such entities are also common in the private equity, venture capital, hedge fund and real estate industries, as well as with small businesses, doctors and law firms.
Trump’s tax plan proposes an array of tax cuts for individuals, and it would cut the statutory income-tax rate for corporations to 15 percent from 35 percent. He has also proposed setting a 15 percent rate for pass-through income, a move he has pitched as a boon for small businesses.
Still, that lower rate—as proposed—would appear to benefit the highest earners most. More than two-thirds of pass-through income flows to the top 1 percent of tax filers, according to a study by the Center for Budget and Policy Priorities.
Asked about his pass-through plan Thursday morning on CNBC, Trump said: “We are looking at that very strongly and it’s going to be reported on within two weeks.”
Trump has also proposed to end the special tax treatment attached to so-called “carried interest” —the portion of investment income paid to private-equity managers and other investment professionals. Currently, it’s taxed as capital gains at rates as low as 23.8 percent, far below the 39.6 percent rate for ordinary income. Like Trump, Clinton also wants to tax carried interest as ordinary income.
But under Trump’s broad plan to tax pass-through income at 15 percent, it would be possible for investment managers to achieve an even lower rate. Moore said campaign advisers are working to fix that with regard to carried interest.
“We’ve decided in the campaign that we’re going to treat it as wage and salary income,” he said. “There are arguably some components of carried interest that are both, so it’s tricky, but that’s what we decided.”
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