Does Trump's Tax Plan Single Out Family Trusts As A Way To Subsidize Corporate Tax Cuts?

According to an analysis from the Tax Policy Center, the Senate's recently passed tax plan will increase the after-tax income of folks in every income bracket.  Of course, there are exceptions to every rule and plenty of arguments to be had between the Left and Right over how the tax savings scraps should be divvied up, but in the aggregate individual tax payers should see their net incomes increase in 2019.

But when it comes to the taxation of business income, one group of small business owners is about to get a massive tax increase, on a relative basis, compared corporations and other pass-through entities: Family Trusts.

As the Wall Street Journal points out this morning, many small businesses in the U.S. are organized as family trusts as a way to preserve an enterprise for succeeding generations, protect against estate taxes or a divorcing spouse or other claimants who might try to seize a stake.  But while the Senate tax bill provides a massive tax cut for corporations and individually-owned pass-through corporations, small businesses organized as family trusts will see no changes making them much less competitive on a pro forma basis.

Family-owned businesses represent a large slice of the universe of so-called “pass through” companies, which are organized as partnerships, limited liability companies and S Corporations, and pay taxes through individual rather than corporate returns. Trusts in this category of business include Hobby Lobby, the arts and crafts chain founded by billionaire David Green, and Love’s Travel Stop. They also include a whole host of other small businesses from grocery stores, to packaging makers, wholesalers, beer distributors and family farms.

Tax writers in the Senate crafted the bill in a way that prevents trusts and estates that operate businesses from reaping the benefits of new low business tax rates. Republican tax writers haven’t explained their motives, but the move could save billions.

“If they are really left out of this, that in my opinion would be a problem,” said Ed McCaffery, who teaches tax law at the University of Southern California’s law school.

Loves

As the Tax Policy Center notes, under the Senate's tax plan, Corporations will see their tax rates slashed from 35% to 20% and pass-through entities owned by individuals would also benefit while family trusts, randomly, would continue to see every dollar of their income taxed at the top marginal rate.

Earnings generated by such trusts are taxed as ordinary income—even if that income is retained with the company to be reinvested later. Every dollar of income is taxed at the top marginal rate, currently 39.6%, but 38.5% under the Senate bill. The Senate bill creates a new rule for pass-through businesses that gives those that qualify up to a 23% deduction on their tax rate. Trusts wouldn’t get that deduction.

 

In contrast, other qualifying pass-through businesses would receive a top tax rate of just under 30%, when factoring in the new deduction. The tax rate applied to corporations would drop to 20% under both House and Senate tax bills. In other words, businesses held in trust would have to pay taxes of from 10 to 20 percentage points more than other types of companies.

“This is potentially devastating to myself and others,” said Deborah Jacob, the chairman of MJS Packaging, which employs more than 100 people to design, make and distribute packaging and containers.

Senator Ron Johnson (R-WI), a vocal opponent of this particular component of the Senate tax plan, said that family trusts are simply being singled out as a way to save tax revenue because they're an "easy target"..."We’ve singled them out to be mistreated. We couldn’t offer that kind of discount to everybody so let’s cut out trusts because they’re an easy one to pick off—we always hear about trust babies."

Of course, the final tax plan that comes out of the conference between the Senate and House will undoubtedly look very different from the two bills that went in...the only question is whether the largest family trusts paid their lobbyists enough to matter.

As reference, here is a comprehensive comparison of current tax laws versus the House and Senate bills that were recently passed, courtesy of the Tax Policy Center (click on the image for a larger view).

Comments

ParkAveFlasher Thu, 12/07/2017 - 13:38 Permalink

"I felt a great disturbance in the Force, as if millions of hipsters suddenly cried out in terror, and were suddenly silenced. I fear something terrible has happened in Brooklyn."

Gap Admirer knukles Thu, 12/07/2017 - 13:52 Permalink

And who pays corporate taxes? Tip: YOU DO. Any expense incurred by a corporation will be passed on to the consumer via higher prices. Corporations do not have a magic pot of self-generating money (they aren't the Fed) that they pull an infinite amount of tax payments out of. Yes, they are taxes on corporate profits but the corporation must make profits to survive.

Shrink government so taxes on people's time/income can go down.

Corporate taxes (taxes passed on to the consumer) should be zero.

In reply to by knukles

Aerows Gap Admirer Thu, 12/07/2017 - 13:56 Permalink

But they do have CEO's, some hideously incompetent, that earn a king's ransom riding the wave of being the head of a monopoly.Besides, I've never met a business manager that didn't whine, wheedle and scream about anything that makes their personal bottom line lower.  Thing happens, company doesn't go out of business, life goes on, crybaby goes back to life as usual.That is their function.  That doesn't mean they need to be unopposed, it just means that they join the rest of the world. 

In reply to by Gap Admirer

Gap Admirer Aerows Thu, 12/07/2017 - 13:59 Permalink

Then become a major shareholder and vote a lower salary for the CEO. Even better: start your own company and run it the "right" way with a low paid CEO (you?) and managers who don't whine.

Which, of course, has nothing to do with an ENORMOUS government wanting to place hidden taxes on people via higher prices on products due to higher burdens on corporations.

In reply to by Aerows

reload Gap Admirer Thu, 12/07/2017 - 14:10 Permalink

I did read an interesting article somewhere recently which argued that in the 50`s - 60`s & 70`s pre wholesale globalisation when there was indeed genuine investment and job creation that the reason was way higher corporation taxes. The argument went soething like this:The board of `xyz & co` sit round the table and discuss what to do with this years expected profit of $10M - the choice is essentially, pay a huge tax bill OR increase their product range / build another factory / hire more syaff. The argument said they mostly chose the latter - resulting in ecconomic growth and job opportunities. Clearly there was much else in play - loads of cheap energy, no real competition in the manufacture of finished goods form the `asian tigers` or BRICS ecconomies, much less regulation and red tape, etc etc.But today, the main concern of many large caps and many smaller ones is quite different. How to juice executive compensation, trigger share option distribution points, drive down fixed overheads and support the share price with dividends or market share growth.  Perhaps it is parly the backdrop of low (or for many) entirely optional corporation tax bills which enables this behaviour and the steady hollowing out of what were once regarded as the developed ecconomies of the `west`.   

In reply to by Gap Admirer

LSD - Lower Sl… reload Thu, 12/07/2017 - 14:19 Permalink

So from what you've read ("Perhaps it is parly the backdrop of low (or for many) entirely optional corporation tax bills which enables this behaviour"), larger government is the solution. The government simply needs to raise corporate taxes high enough where they encourage corporations to get back to investing in the economy, etc, (with less money due to higher taxes).

In reply to by reload

reload LSD - Lower Sl… Thu, 12/07/2017 - 14:54 Permalink

Actually I detest taxation of pretty much every type and percentage. I believe that small if not tiny government keeping out of the way is overall a benefit to society. If Only.But I did think the argument I read was interesting. There is certainly no interest in OR imoerative for corporations to invest any of their profits in the countries where those profits are generated. Apple is a prime example - and who thinks that is a benefit to anybody? - and I include the slaves a Foxcon. The benefit from such a system is purely for the slave owner capital class, the vultures and looters. I dont think that is too great either.I am in the UK. If I wanted to open a coffee shop, as a small domestic business I would pay corporation tax - I would immediately be at a massive disadvantage to Starbucks and co who pay no corporation tax in the UK, because they claim they make no profit. They book the profit in Luxemburg where they have cut a deal to pay a tiny rate. All legal - fuck all the UK tax authorities can do about it. So starbucks and co have a large cash float to buy up premesis that potential competitors might like, for inflated prices, which again keeps competition out.What we need more than anything is a level playing field. I expect the same non cmpetitive, tax induced dynamics happen in the USA as they do here. 

In reply to by LSD - Lower Sl…

GunnerySgtHartman reload Thu, 12/07/2017 - 15:29 Permalink

Very interesting.  I have to wonder if part of the reason companies performed genuine reinvestment back then was because we didn't have the ability to financialize everything thanks to going off the gold standard.  Being on the gold standard prevented companies from financializing things like they have in the last 35 years.  There was no casino back then, at least not like we have now.

In reply to by reload

Simplifiedfrisbee Gap Admirer Thu, 12/07/2017 - 14:17 Permalink

This site was established for anti globalist, anti Zionist, anti fascist, anti corporatocracy and anti corruption people. You are nothing but a pathetic, uninteresting, and ill informed fanatic. The president is not the solution to our socioeconomic issues. At least have the courage to say you’re a racist xenophobic hypocrite and that you simply like to cheer.

In reply to by Gap Admirer

JohninMK Thu, 12/07/2017 - 13:48 Permalink

Do these trusts include the trusts that were set up by the 'robber barons' which are believed to hold vast wealth? Or are they different?

Dg4884 Thu, 12/07/2017 - 14:00 Permalink

Dang man, I feel subservant to even comment on this.  I ain't got no trust.  I started my first job in 11th grade as a bus boy at a rattlesnake restaruant. Me and my buddy Myles.  I lasted about two weeks longer than him.

Rex Andrus Thu, 12/07/2017 - 14:03 Permalink

Trump's tax plan went into 2 chambers of the swamp. What this is is toxic swamp shit packaged for the failed government death camps & branded to calm the sheep before they eat it. What did you expect, a fair deal? I bet you think the machines reinserted Cifer, too.

bankonzhongguo Thu, 12/07/2017 - 14:29 Permalink

The tax code is just another gamed system to keep a select industry employed - tax and CPAs.It's corruption is no different than insurance and big pharma.Made up rules and needless complexity and inefficiency.You could write the entire tax code on one piece of paper and collect more - also killing an industry.So there is that.   

I Write Code Thu, 12/07/2017 - 14:30 Permalink

I think the vast majority of family trusts now are little tiny things set up by the brokers for their clients as a cheap way to escape the inheritance tax.  I was not aware that any going businesses were set up that way, and I'm not sure what to think of those that are.

BetweenThe Coasts Thu, 12/07/2017 - 16:38 Permalink

"The first country that wakes up and abolishes income taxes will blow everyone else out of the water. All they have to do is say they will adopt the way the United States became great. There were only indirect taxes between 1792 and 1913. If the nation survived with no income taxes, we can do it again and let the people spend their own money. You will see massive job creation and governments will stop competing with the private sector to borrow money." -Martin Armstronghttps://www.armstrongeconomics.com/world-news/sovereign-debt-crisis/tru… pages of Internal Revenue tax code. F all the Washington Swamp.

Grouchy Marx Thu, 12/07/2017 - 17:39 Permalink

Fake news. Businesses organized as trusts will simply reorganize to suit their best interest with respect to the new tax realities.A serious temporary nuisance for them, but not a permanent or unsolveable issue.

Squirrel Team Z Thu, 12/07/2017 - 23:03 Permalink

The target is H1b Visa anchor businesses, which hide billions of dollars in so called family businesses. They use those anchors to bring in more immigrants, which they often employ as slaves, controlling every aspect of food and housing as a business expense. You've been seeing it for decades in all the corner convenience stores, motel chains and movie theatres.  The tax is on profits and inventory, if you are healthily cycling through those, you should be a few notches above zero.