Treasury Secretary Steven Mnuchin cautioned that not all businesses currently classified as pass-through entities would see their rates slashed to 15 percent under the White House’s tax plan — an indication that hedge funds and other high-earning partnerships and limited liability companies might not get major breaks.
“I assure you we are not going to allow all pass-throughs to get that rate,” Mnuchin said during a hearing before the Senate Banking Committee in response to a question from Senator Elizabeth Warren. When pressed by Warren, he also said the restrictions on which firms would get the tax cut would apply to current pass-through entities as well as to businesses that adopt that structure in the future.
Pass-through businesses, which include small operations like corner stores and free-lancers, but also doctors, lawyers, consultants and vastly profitable hedge funds, don’t pay any taxes themselves, but pass their earnings through to their owners, who then pay taxes at their individual income-tax rates. Under current law, the top federal income tax rate, which applies to the highest earners, is 39.6 percent.
A study released Monday from the Urban-Brookings Tax Policy Center showed that cutting the rate for all pass-throughs would mostly benefit the top 1 percent of Americans in terms of income.
After a dramatic exchange at Thursday’s hearing about breaking up the biggest banks, Warren followed up with questions for Mnuchin on the pass-through rate. Critics of the measure have said it would set off a stampede of individual taxpayers trying to reclassify themselves as pass-throughs.
“Why is this administration giving the ultrawealthy this massive tax cut?” Warren, a Massachusetts Democrat, asked.
Top 1 Percent
Mnuchin responded by saying there would be procedures in place to ensure small- and medium-sized businesses would qualify for the lower rate, while people who should be paying higher taxes don’t use pass-throughs to take advantage of the system.
More than three-quarters of a broad pass-through rate cut would go to the top 1 percent of households, which make at least $700,000 a year, according to the Tax Policy Center report. Those filers would get an average annual tax cut of about $76,000, according to the analysis, which assumed that the rate would be applied without any restrictions on what’s classified as income.
The center also estimated that the cost of reducing the pass-through rate to 15 percent would be as high as $2 trillion over a decade. The Committee for a Responsible Federal Budget has released an estimate that the overall cost of Trump’s tax plan could reach $5 trillion over a decade — though the group acknowledged its estimate was rough because the White House has released few details of its plan so far.
Mnuchin disputed that cost figure during the hearing, saying the White House would never have proposed a plan that it thought would cost $5 trillion over a decade. He said more details of Trump’s plan, which would provide a better sense of its cost, would be released in the “near term.”