The latest round of tax reform, signed into law by President Trump a year ago, delivered a fresh perk for many business owners.
The new pass-through break, valued by the nonpartisan Joint Committee on Taxation at $415 billion over a decade, creates a 20 percent tax break for owners who qualify. Well paid lawyers, doctors, accountants, investment bankers and other “service” businesses are barred from the break, but others can slash their top marginal rate to less than 30 percent, from 37 percent under current law and 39.6 percent pre-tax reform.
The law also gave a break to corporations, reducing their rate from 35 percent to 21 percent, and kept in place provisions that levied higher rates on wages than on capital gains and most corporate dividends. A salaried CEO pays a marginal tax rate of 37 percent, while a shareholder collecting dividends or a stock gain pays at most a federal rate of 23.8 percent.
Inequality and taxes are certain to be key issues among Democrats seeking to challenge Trump for the White House. Senator Kamala Harris of California, who announced her 2020 presidential run this week, proposed in October paying middle-class and working families a refundable tax credit of as much as $6,000 a year. Senate Democrats have also proposed repealing major parts of Trump’s tax overhaul.
To the Trump administration and conservative economists, lower taxes on investors and owners encourage investment and entrepreneurship. For those demanding higher taxes on the wealthy, however, levying so many different rates on various forms of income is a problem. By merely raising the marginal rate on wages or pass-through businesses, for example, you could end up pushing more income back into corporate structures, warns University of California Berkeley professor Emmanuel Saez, one of the economists who helped Warren develop her wealth tax proposal.
The latest research “shows that the distinction [between] capital versus labor income is overblown,” Saez said. “Hence it is critical to align tax rates on different forms of income to limit tax avoidance opportunities.”
This article provided by Bloomberg News.