A provision in presumed GOP presidential nominee Donald Trump’s tax plan to cap the top individual income tax rate on pass-through businesses at 15 percent could be a game changer for sole proprietors, partnerships, LLCs and S corporations.
Some businesses currently face a top federal marginal rate of 39.6 percent, while state and local income taxes range from zero to 13.3 percent. Experts say changing the business rate, not just the corporate rate, would benefit both corporations and unincorporated businesses alike – stimulating the country’s economic growth.
Cutting the business rate would help the United States attract and retain commerce in the global marketplace, according to Americans for Tax Reform President Grover Norquist.
“The European average is 25 percent, we’re presently at 35 percent, so we’re today hobbled by not only rate relations, but high tax rates – higher than the average in Europe,” he told The Daily Caller News Foundation. “Trump’s tax cut would take business taxes for large and small businesses from 35 percent down to 15 percent, so it would make us able to compete throughout the world in a way that we are not able to now.”
Norquist said the country used to have one of the lightest tax rates in the Western world. The U.S. stopped cutting after the Reagan administration, while the rest of the world continued – creating an incentive for companies to do business abroad.
“Right now we run a race against European and Chinese firms with a cannonball tied to one of our legs – this would remove that,” he continued. “We would have a lighter tax burden on American workers rather than a heavier tax burden than the rest of the world.”
Despite Trump calling for a rate 5 percent lower than what was recently laid out in the GOP task force’s proposal, some experts say the House Republican blueprint may have an advantage over the billionaire’s draft.
Trump’s plan still has its flaws, even though lowering the business rate would be a positive, according to Pete Sepp, the president of the National Taxpayers Union, an Alexandria, Va.-based taxpayer advocacy group.
“There are major differences in the treatment of income and expenses, to the point where the 15 percent rate under the Trump plan is not nearly as attractive for many businesses as the recent House GOP proposal,” Sepp told TheDCNF. “For example, the Trump plan retains the current investment and expense write-off rules, complete with all of the confusing depreciation schedules. In addition, the Trump plan actually worsens the flawed ‘worldwide’ taxation method of earnings abroad.”
Sepp said the presidential hopeful’s trade policies could potentially cancel out any economic growth that would come from the lower rate.
“We have to consider how this fits in with Trump’s plans on trade, which would amount to massive new tax increases on consumers and small businesses that either export finished goods (which would be subject to retaliatory tariffs) or import raw materials for their own goods and services,” he said. “These destructive policies could further offset the gains made by a 15 percent corporate and pass-through rate.”
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