Trump’s proposed tax rate for “pass-through” businesses is unfair

President Trump has proposed a maximum 25% tax rate on income that individuals receive from “pass through entities”.  Pass through entities are businesses that don’t pay corporate income taxes, but rather pass their net income each year through to the owners to be taxed as part of the owners’ individual tax return.  These pass through entities include S-Corporations, partnerships, limited liability companies (LLCs), and sole proprietorships.  Currently, income from pass through entities is taxed at the same rate as any other ordinary income – up to a maximum rate of 39.5%.  (President Trump’s proposal for ordinary income for most taxpayers is a maximum tax rate of 35%.)  He justifies the lower tax rate for pass through entities because, he says, these pass through businesses are the job creators.

This begs at least two questions:  Do pass through entities really create more jobs than non-pass through entities?  Even if so, why should the income of an employer be taxed at a lower rate than an employee if they earn the same amount?  Tax fairness would dictate that two people with the same income would pay the same amount of tax, regardless of source.

Regarding job creation, it is important to know that pass through entities are not just manufacturers, wholesalers or retailers, who may or may not be job creators.  They are also professionals such as doctors, lawyers, accountants. Most hedge funds and private equity funds are pass through entities.  About 95% of all businesses are pass through entities.  Of those, about 99% have revenues of less than $10 million.  The 1% of pass through entities with revenues of more than $10 million earn about 83% of all profits!  So, some pass through entities are very large, and many owners of pass through entities have very high incomes.  Is it fair for business owners to pay at a 25% rate while regular workers with the same income pay at a 35% rate?  I don’t think so.

I expect to write several blog posts on President Trump’s tax proposal.  The idea of reducing tax rates is a good one – especially if the total plan is revenue neutral and doesn’t increase our $20 Trillion debt.  This means that tax reform that reduces rates must also reduce special tax breaks for politically favored groups and/or reduce spending.  I hope that Congress, which controls all tax legislation, will not “bet on the come” – that is assume future tax revenue will increase due to future growth in the economy.  Our government uses a 10 year look forward to determine the deficit/surplus effect of any change in taxing or spending.  In recent decades, it seems that all tax and spending changes have significant costs up front with the promise of savings toward the end the the 10 year period.  Let’s not keep doing that.

Source: https://www.brookings.edu/research/9-facts-about-pass-through-businesses/

Church free speech okay – no charitable tax deduction for donors

Churches and their leaders should be free to  speak out for or against candidates for political office.  Our Constitution guarantees freedom of speech for all, and especially for political or religious speech.
What our government should NOT do is allow a charitable tax deduction to donors who contribute money to churches that advocate for or against specific candidates.   If churches want to be treated just like other organizations that advocate for or against specific candidates, donors should be willing to give up their charitable tax deduction for contributions they make to those churches.
If churches are allowed to advocate for or against candidates and donors are given a charitable tax deduction for contributions made to such churches, then it would only be fair to give tax deductions to all donors to political organizations.  Better to not give the charitable deduction to any of them.
Related Register article:

Not all tax exempt organizations are the same.

The Register still has it wrong. (“Churches cross line with political endorsements”, 4/9/2015 – see link below.)  Churches with ministers who advocate for specific candidates should be allowed to be tax exempt.  But donors who contribute to them should not get a charitable tax deduction.

There are two types of tax-exempt organizations. First, there are the Charitable, Religious and Educational organizations, (tax code 501c3 organizations), that pay no income taxes, (and often don’t pay other taxes), plus donors get a charitable tax deduction on their income taxes for the amount of their contribution.  Second, there are all other tax-exempt organizations that pay no income taxes, (and often don’t pay other taxes), but donors do NOT get a charitable deduction. They are properly classified as tax exempt, since they are organized to not make any kind of profit, but their activities are not charitable, so no charitable tax deduction is given.

There are many tax exempt organizations that do not make any profit, but that are not charitable and whose donors don’t get a tax deduction.  They include Rotary clubs, political parties, country clubs, political issue organizations, chambers of commerce, special interest clubs, etc.  None of them try to make any profit, but they are not charitable.

To the extent that any not-for-profit organization advocates for or against specific candidates, that organization is not doing charitable work. It is doing political work. Under the principle of equal treatment under the law, donors to churches that advocate for specific candidates should not get a charitable tax deduction.  If a church wants its donors to receive a charitable tax deduction for contributions made, then the minister should not advocate for candidates from the pulpit, or through any other communication from the church.

Link to Register editorial: http://www.desmoinesregister.com/story/opinion/editorials/caucus/2015/04/08/rgisters-editorial-churches-cross-line-political-endorsements/25500433/

 

IRS wrong to delay tax exempt status.

The IRS should quickly and easily approve the income tax exempt status of most political organizations.  An organization should pay income taxes only if it actually earns a profit.  If people want to pool their money together for any purpose other than to make a profit, the the act of contributing money to the pool should not be taxed.  The following are examples of organizations that are properly exempt from income taxes: churches, charities, non-profit educational institutions, private social clubs, political organizations.  Exemptions from other types of taxes, such as sales and property taxes, are made at the state level.  Just because an organization does not make a profit and is exempt from income taxes should not automatically make it exempt from other types of taxes.