The Republican Tax Plan’s Magic Asterisk

The Republican Tax Plan’s Magic Asterisk
“If you’re an accountant firm and that’s clearly income, you’ll be taxed an income rate, you
won’t be taxed a pass-through rate,” Mr. Mnuchin said at the Delivering Alpha conference.
“The framework contemplates that the committees will adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals
from avoiding the top personal tax rate,” says the tax reform blueprint presented on Wednesday by congressional Republicans and the Trump administration.
So, for example, if a person earned $1 million from a real estate partnership, perhaps $300,000 of
that would be taxed at only 25 percent, with the other $700,000 taxed at the full income tax rate.
Currently, such income is taxed at the owners’ individual income tax rate, which is
as high as 39.6 percent (and would fall to 35 percent in the Republican plan).
The Republicans want the pass-through businesses to have a tax rate more in line with
that of big, C-class corporations (which they are proposing to tax at 20 percent).
Under the current tax code, income up to $153,100 for a married couple is taxed at 25 percent or below, meaning a couple with earnings below
that threshold has nothing to gain from the lower pass-through rate.
But people above that level — and especially those at $470,700
and above paying the top 39.6 percent rate — could reduce their tax bill precipitously by, for example, forming a limited liability company and signing a consulting contract with their employer rather than working as an employee.