White House Proposes Slashing Tax Rates for Individuals and Businesses | Hacker News Reader

White House Proposes Slashing Tax Rates for Individuals and Businesses

nytimes.com

35 pointsuyoakaoma97 comments

This is a purely political story, though it might look like an important policy or news story. It isn't.

Every administration proposes a tax plan. But, of course, tax policy is set by Congress. The President is (usually) the ostensible leader of the party, and this President's party controls both houses of Congress, but by both rule and statute they'll need a filibuster-proof majority to pass most of these policies --- and, because the "popular" parts of this proposal will balloon the deficit, they probably won't get unanimous support from their own party.

This is all academic anyways. It seems somewhat traditional for the administration to propose a fairytale tax plan, and traditional for that proposal not to have much impact on policy.

Except, the AMT potentially affects many here directly and significantly. And the repatriation holiday potentially affects some of the big tech companies directly and significantly.

Without offsets far more unpopular than the AMT, an outright repeal of the AMT would add trillions of dollars to the deficit. They'll be attempting to do that against a headwind of stories explaining that the repeal of the AMT would have cut Trump's own 2005 taxes (a year we know something about) by 85%.

I'm not saying AMT reform isn't going to happen. Any of these things --- well, not a 15% cap on LLC pass-through income taxes --- could happen. The point is that this document isn't the harbinger of those things happening.

> by both rule and statute they'll need a filibuster-proof majority to pass most of these policies

Couldn't the republicans use reconciliation (in which only a simple majority vote is needed) to push tax reform?

No. By statute, you can't use reconciliation to pass a bill that raises the deficit 10 years out. It's not even a Senate rule they can "go nuclear" on: it's a law.

Is there a political cost or statutory block to doing a Bush-tax-cuts-style 10 year expiring plan? Regardless of the merits, most of those cuts are still law, and the GOP was able to extract concessions for the parts that were allowed to expire.

Once in place, tax cuts are hard to reverse even through inaction.

The Bush tax cuts expired in 10 years because the deficit projections allowed it to last that long. Projections for this proposal --- which again I think we should treat as fictitious, like every administration's first tax plan --- give it 2 years.

This doesn't sound right to me. Reconciliation is a rule adopted by Congress as allowed for by Article I, Section 5.2. It doesn't sound right that a statute can be controlling over Congressional rules. I would appreciate a link to the statute you had in mind.

It seems more likely that the rules, and not a statute, forbid using reconciliation in that case. Of course those rules could be changed by a majority vote, I believe.

I think the only Constitution constraint is that budget bills must originate in the House.

If they used reconciliation, they would expire in a couple of years.

Corporations are not going to adjust their structure based on something that's going to expire in a couple of years so if reconciliation was used we'd get none of the job benefits of a corporate tax cuts, at massive expense.

Not an American but this is interesting....

> The estate tax and the alternative minimum tax, which Mr. Trump has railed against for years, would be repealed under his plan.

The AMT is one of the largest issues for people calling their stock options on non liquid companies.

> Mr. Mnuchin offered few specifics about the blueprint, other than confirming that its centerpiece will be a 15 percent business tax rate

This is also very interesting, and I think, its the core of Trump's tax plan. Instead of giving corporations a tax holiday to bring back offshore money, just lower the tax rate to create a permanent tax holiday.

If the numbers are to be believed ( 250 Billion for Apple alone) then this could add alot of money to the US economy over the next few years. Look for a wave of US company to US company acquisitions to spring up if this comes to fruition.

Event driven hedge funds are going to have a bonanza with this!

It might even be enough to make the economy jump going into the next election cycle.

>The AMT is one of the largest issues for people calling their stock options on non liquid companies.

This cannot be stated loudly enough.

Can you elaborate?

Donald Trump owns a large, illiquid, private company.

The AMT is one of the few taxes Donald has had to pay since he wrote-down a billion dollar loss in the 90s.

That's all I know.

If a company (startup or otherwise) is private, then stock options holders can't liquidate their shares. However, they are still required to pay taxes on the capital gains when they exercise, which can be huge if the company has grown exponentially.

Not only do you have to take the risk of the stock/company crashing and burning but you have to pay in advance the taxes on the "gains" which you can't actually cash out. It's a trap, only thing you can do is stay at your company until liquidity occurs for shareholders.

I don't think I fully comprehend - do stock options holders need to pay tax even if they have not added actual money to their bank account?

Why would someone have to pay in advance taxes on a gain that has not actually happened? If I don't have the money in my bank account yet, how can I pay this huge amount of gains tax even?

They exercise the options.

> Do stock options holders need to pay tax even if they have not added actual money to their bank account?

Yes. The options are converted into shares, which is considered a taxable event by the IRS. Ordinarily this isn't a problem because you can sell some fraction of the stock that you gained to pay for the taxes. But if the company is not public, you have no easy way to sell the shares.

> If I don't have the money in my bank account yet, how can I pay this huge amount of gains tax even?

That's exactly the problem. Many employees at unicorn startups are stuck in "golden handcuffs." If they leave, they oftentimes can't exercise their options due to the taxes, in which case they lose them. This forces them to stay in the hopes that one day the company will go public and they can exercise their options.

Just to make this clear (correct me if I'm wrong)... If you buy stock at market value, and it increases in value over time, you only pay tax when you sell it. But if you exercise a stock option (in which you purchase stock for a [typically] lower price than current value), the difference in value is considered the same as if you received any other non-monetary income (i.e, that difference in value is treated the same as a stock grant), in which you would have to pay tax in the current year. Did that about sum it up?

That's my understanding of it.

It's designed to prevent you from being able to defer taxation (interest-free leveraging of income you'd otherwise have paid in tax, essentially) or to reduce your taxation to the long-term capital gains rate.

I'm not sure if the authors of the AMT really considered how options with limited liquidity could create this bind.

Companies that grant options could fix this in a heartbeat by extending exercise windows; they choose not to do that. Nothing to do with AMT here.

If AMT repeal would 'fix' stock options, companies will change the terms to 'break' them again because they are handcuffs, not payments.

There is a tax holiday in addition to the lower corporate rate.

The plan would include a special one-time tax to entice companies to repatriate cash that they are parking overseas.

Why would apple repatriate their foreign assets (other than paying dividends)? They can borrow anything they need already.

Bloomberg's article says "It also imposes a one-time tax on about $2.6 trillion in earnings that U.S. companies have parked overseas." - So, I am a bit lost also on this plan getting Apple to repatriate.

https://www.bloomberg.com/news/articles/2017-04-26/white-hou...

Seriously. Nobody who hasn't gone through the ISO+AMT hell could possibly internalize how Kafkaesque and insane it is.

AMT is also a huge issue for parts of the middle class. It was originally designed to target upper class tax payers that would use loop holes. The problem is that it was never indexed for inflation, so now parts of the middle class suffer from the AMT

Repealing the estate tax? The tax instituted by our founding fathers, specifically as a safeguard against the creation of an aristocratic class? A tax that ONLY affects people with more than 5 million at time of death?

For shame.

https://en.wikipedia.org/wiki/Estate_tax_in_the_United_State...

According to the IRS, a temporary stamp tax in 1797 applied a tax of varying size depending on the size of the bequest, ranging from 25 cents for a bequest between $50–$100, to 1 dollar for each $500. The tax was repealed in 1802. In the 19th century, the Revenue Act of 1862 and the War Revenue Act of 1898 also imposed rates, but were each repealed shortly thereafter. The modern estate tax was enacted in 1916.

The founding fathers enabled the tax. It was re-instated and repealed into and through the gilded age. It was finally re-enacted at the beginning of the 20th century, and has remained in place since.

> The founding fathers enabled the tax.

They repealed the tax 5 years later. Also, it was $1 per $500 (0.2%).

> It was re-instated

as part of the Tax act of 1862 to help fund the Civil War and repealed after the war was paid for.

That history does not scream "must prevent creation of dynastic wealth!" to me.

straw man, it was the stated reason they originally implemented the tax, and has been the reason people have defended it since.

That's not a straw man. You said:

> The tax instituted by our founding fathers, specifically as a safeguard against the creation of an aristocratic class?

fr0sty essentially said that your original statement should be amended to something like: "The tax instituted by our founding fathers, specifically (so they said) as a safeguard against the creation of an aristocratic class, and then repealed five years later to show that they weren't very serious about preventing aristocracy (or no longer believed in the tax as a cure for it).

And a 0.2% tax rate is directly relevant to the actual effectiveness of the tax at preventing the aristocracy (as in, not very effective at all).

You also said:

> A tax that ONLY affects people with more than 5 million at time of death?

But that's the current state of affairs now. When originally implemented, it applied to estates as small as $50. Placing that in the very next sentence to the founding fathers has the potential to be misleading.

The amount of effort arguing for its historical acceptance is a true testament to the rhetorical importance of status quo bias.

They always mention how the inheritance tax hurts family farms...

The current exemption is more than $5 million. People saying that are full of shit.

Sure, someone inheriting a $6 million plot of land will owe taxes on $600,000 of income. I wonder if they could secure a loan somehow?

> The current exemption is more than $5 million. People saying that are full of shit.

Have you looked at land, livestock, infrastructure, and equipment costs they tax? People saying that are not "full of shit" and an unexpected death can ruin not only the farming family but the folks they hire.

An enterprise valued at more than $5 million, with lots of employees, is not a "family farm", at least not in the traditional sense.

I totally agree that a tax on inheritances above $5 million will tend to impact family owned businesses worth $5 million though.

Actually, in North Dakota it is a family farm since we specifically outlaw corporate farms. $5 million when the combine (or some tractors if renting the combines) is a $1 million plus some storage bins and the per acre cost of farmland is not a big farm. So, in the traditional sense, farming is really easy to tax infrastructure activity. That is why that tax is so hated. Farms are damn expensive.

I'm pretty sure other millionaires hate taxes too.

Millionaire only when the tax man comes calling is quite a bit different than Silicon Valley millionaire after an IPO.

It sounds to me like the problem here is the specific combination of the state statute requiring farms to be owned by families and the federal estate tax. If so, it seems that there are multiple ways to solve this problem without wholesale repeal of the tax.

Nobody wanted the estate tax to mean "the government gets 10% of Wal-Mart when Sam Walton dies". If that's the outcome that results in some cases, then fix that problem.

Fixing the problem is pretty simple, repeal the tax. Its unseemly to tax a person when they die. Just the adding of grief (which I have recently experienced) is something we should not do to people. Plus, the continuing of this tax makes it hard for new family businesses (and a lot of minority owned family businesses are new) to build up like the incumbents were allowed.

You've shifted your argument to one that is not particularly convincing to someone who doesn't already share a right wing economic view.

The North Dakota farm issue was interesting, as something I wasn't aware of (and thank you for bringing it up!) I'm less interested in engaging with the general libertarian argument against taxation.

There's no a priori reason that property rights should survive a person's death, and plenty of arguments against allowing hereditary accumulation of wealth. Note also that currently the first $5.5 million is exempt, which is more than enough for the vast majority of individuals and even quite a few small businesses.

Is it something specific to farming?

How is that different from, for example, $5,000,000 to buy a lot, build a gym, and stock it with equipment?

Don't know, never really talked to a gym owner before, but my suspicion is that it probably is a huge problem for anyone who builds up assets (that a tax person values highly) to do the job but not a lot of actual cash to pay the taxes. I think land or infrastructure intensive activities are probably all in the same boat.

> An enterprise valued at more than $5 million, with lots of employees, is not a "family farm"

What? Plenty of small businesses can generate more than $5 million in revenue annually, but still be a small family business. $5 million sounds like a lot for an individual, but for a business, not so much... especially after all the expenses that come with operating a business and having employees.

We're talking about farms here, farming equipment alone could be valued several million dollars by itself. The $5 million figure is the value of the business, which includes assets and projected revenues (not profits!)... it's quite possible for someone to inherit a family farm and immediately be financially ruined... buried under a large income tax bill.

Yes, I understand what "value" is.

You are muddying the distinction between revenue and value in your first paragraph and correcting my understanding in the 2nd. Why?

There is an argument to be made, that the valuations used are unfair, but if you inherit an actual $6 million operation and are forced to liquidate to pay the $200,000 tax bill, I doubt you are financially ruined. In fact, I expect you are a cash millionaire.

> if you inherit an actual $6 million operation and are forced to liquidate to pay the $200,000 tax bill, I doubt you are financially ruined. In fact, I expect you are a cash millionaire.

You make the assumption that you are able to sell the operation for the tax value which is a pretty wrong one. Plus, ignoring the people who depended on the continuing operation of the family business is not a good thing. Never mind the psychological damage of destroying what the family has worked for at a time when you need help not the tax man ripping down what you built.

You'd still be a millionaire if you managed 1/6th of the taxable value. And of course, if we fixed the system for valuing the property, it sounds like no tax would be paid.

I get that you think it is unfair to tax wealth at death. That's fine. Land and tractors aren't special wealth, that's where my "full of shit" came from. As far as the timing of the tax, there's plenty of people that go through the death of relatives while being completely financially insecure.

Selling something like this, even at a firesale price, is likely to take a very long time. So long that you're likely to get a knock from Uncle Sam before you get all this cash you're talking about.

Inheriting something like this is not a bed full of roses. It can become quite a nightmare, and it can indeed ruin people who are not prepared to take on that kind of tax liability all at once without any up-front funds to pay it off.

Yes, it is quite fascinating that people are building up $6-7 million operations without having any cash in reserve at all.

The part you seem to be missing is that the business might be valued at $6-7 million on paper, but it does not generate anywhere near that in annual revenue, let alone profits.

We already acknowledged what makes up that on-paper value.

Most of these family farms are more-or-less "lifestyle businesses"... ie. the family owns and operates the farm for a living, and profits only a normal salary annually after all expenses (equipment, repairs, employees, materials, etc)... which is spent on regular things such as toothpaste, toilet paper, shoes, food, etc.

Just like most people, they aren't banking millions per year...

Farming in America is incredibly expensive... but not incredibly lucrative. There are exceptions to this, with mega-corp-farms and what-have-you... but that's not who we're talking about here.

The federal estate tax on a $6 million farm would be roughly $200,000.

You don't need to be making enormous profits to plan for that. You'd certainly need to be making a decent return, but it doesn't take such a huge amount of annual profit to set aside enough to cover it.

What you seem to be missing is that I am really skeptical that people are gathering $6 million of paper wealth without plowing hundreds of thousands of dollars of profits into growing their operations. Maybe some unlucky lucky guy inherited a lot of land that then appreciated a great deal. The horror.

If I understand correctly, it's more like this. You make $50,000 in a good year. When you have to plow money into the operation, you borrow the money to do it. You're able to make payments on this, and that's about all. Putting aside $200,000 in that environment would be pretty hard.

How does such a bleak operation get so big?

Because all the smaller ones couldn't make it. If you only had $2 million in value, you were making less than $20,000 a year, and couldn't support a family at all. (All numbers are made up, but I think the order of magnitude is about right.) So the people with operations that size sold out, and others borrowed money to buy that land, so that they could get up to the level where they're making $50,000 a year and can support a family. (They were able to borrow money on the land, because despite 2008, farmland has not been decreasing in value - or at least not much, so banks are willing to make the loan, because they have good collateral.)

That's the mechanics of how they got that big. As for the "why would rational people ever take that deal" question, I think it's because some people really feel an attachment to the land, to the lifestyle, to the ideal of a family farmer, to family tradition, or some combination thereof.

The table "Principal farm operator household finances, by ERS farm typology, 2015" here provides a slice of information:

https://www.ers.usda.gov/data-products/farm-household-income...

Many farmers are making small amounts or losing money. They appear to mostly have farm assets less than $1 million.

But when you get to the commercial class (still households), with median farm assets of $2.7 million, they are making median farm income of $146,000; with mean farm assets of $4.1 million, they are making mean farm income of $250,000, which is not the 1% of assets you propose.

There is of course much room for variation inside the data, but it appears that many large farms are able to generate a nice return on assets, even at farm sizes smaller than would be subject to current estate taxes.

Cool. Actual data. I stand corrected.

> Plus, ignoring the people who depended on the continuing operation of the family business is not a good thing.

I presume you mean something like the people who work on the farm, and who repair the tractors, and such. But if the family has to sell, the person buying it probably wants it for a farm, not just for a B&B with a really big back yard. So they're probably going to need about the same number of people to work on that farm, and someone to repair the tractors, and so on.

> An enterprise valued at more than $5 million, with lots of employees, is not a "family farm", at least not in the traditional sense.

Of course it is. A non-luxury house can cost $1 million in certain places. A family farm with a couple of siblings and equipment can easily reach $5 million.

If your yearly profit on investment is 10% then an income of $50,000 / year needs half a million investment. You just need 10 people (3 families and some hired hands) to reach $5 million.

I hope you can agree that parents plus 2 married kids is a family farm.

If the ownership is diffuse, the inheritance tax won't apply until the farm is worth some multiple of $5 million.

It's owned by the parents, and the kids get salary and "shares" - i.e. inheritance.

It has to be one way or the other. You made the kids investors to make it easy to get to $5 million but now they aren't investing anything, only working and inheriting.

I can't tell if the 15% applies to LLCs. Anyone know? Is it worth becoming an s corp otherwise?

Would you still have the self employment tax?

LLCs are passthrough entities so you pay what your personal rate. You still pay self employment tax however this might spur some to change their structure to benefit from new tax proposal

Edit: there is also a proposal to change how partnerships and pass through entities are to be taxed.

> LLCs are passthrough entities

they can be, but a lot aren't.

They can elect to be taxed as a c Corp but I would think the vast majority are taxed as a corps or as partnerships.

Self employment tax = Social security tax.

And I don't think it is going away. It's a regressive tax, the most beloved tax.

The proposal seems to state that pass-through entities will be subject to the 15% tax rate as well. From what I've read so far that would seem to mean that all business income from one's LLC would be taxed at 15%, and there wouldn't be any personal income tax to pay on top of that.

That seems improbable, because LLC owners usually recognize all of their income as pass-through distributions; this would be akin to a capped 15% tax on all wealthy people.

The reason you can propose drastically cutting the corporate tax is that it's a tax on money that is again taxed as income when it reaches households. The whole point of an LLC is not to do that.

LLCs that retain lots of income in the corporation indefinitely can elect corporate taxation, to which the proposed reduced rate would presumably apply. But when the LLC distributes that money back to its members, it is again taxed as income. In any case, that may be the basis for this proposal applying to LLCs.

100% agreed, which is why I was pretty surprised to read that in the article but we'll see if that's actually the intended understanding of this proposal.

For reference, here is the excerpt: "Beyond cutting the tax rate to 15 percent for large corporations, which now pay a rate of 35 percent, Mr. Trump also wants that rate for a broad range of firms known as pass-through entities — including hedge funds, real estate concerns like Mr. Trump’s and large partnerships — that currently pay taxes at individual rates, which top off at 39.6 percent."

Their specific mention of pass-through entities might mean that literally but it might have just been a more succinct way to group LLCs, LPs, and PLLPs.

I don't know where the NY Times gets that. It's not mentioned in the actual text of Trump's plan:

http://www.marketwatch.com/story/full-text-of-trump-administ...

That's the précis the White House gave to journalists. The WSJ covered this in more detail. Either way: don't hold your breath for an (absurd!) 15% cap on people who make money through LLCs.

This would be great. When I was doing small side consulting work outside my day job, I would have to pay 1/3 of my net revenue in taxes. I always thought that was very steep if you only making a few thousand on the side.

Neither LLCs nor S-Corps pay corporate taxes.

this tax proposal would change that though, right? it sounds like you'd now pay your personal tax rate or 15%, whichever is lower, on income received from the passthrough entity.

Edit: "Beyond cutting the tax rate to 15 percent for large corporations, which now pay a rate of 35 percent, Mr. Trump also wants that rate for a broad range of firms known as pass-through entities — including hedge funds, real estate concerns like Mr. Trump’s and large partnerships — that currently pay taxes at individual rates, which top off at 39.6 percent."

That's what WSJ suggests, but it is extraordinarily unlikely to be the case; it would effectively cut the income taxes for every business owner in half.

That's what's so exciting about it :-)

The official memo only mentions reducing the business tax to 15%. This would not benefit you in pass through LLC. Business taxes are on top of personal taxes, not in place off.

Raising the standard deduction is nice.

Ideally I'd like to see it drastically raised, like no tax on each person's first $30k. I'm surprised the democrats have never tried to push a policy like this, its the type of policy that would get support from many republican voters.

Deductions apply to highest bracket income. The "first" $30,000 sort of implies lowest bracket income (because if you stopped working after earning that much, it'd reflect your entire earnings).

The standard deduction is effectively a 0% tax bracket.

It's income with a 0% tax rate but the impact on effective rates is different than a 0% bracket; it lowers effective rates more for people that have income in higher brackets.

A 0% bracket has the same impact regardless of income.

I wouldn't mind paying less in taxes.

BUT WHAT ABOUT THE DEFICIT???

The deficit hasn't mattered to anyone before now, esp not in the last 8 years. Can't get any worse than it has been already for years now.

I believe that actually it can become worse (or better) if it changes.

It matters to the GOP when they're not holding the Presidency, apparently.

Just because the tax rate is lowered doesn't mean companies will repatriate their money here. I think we need a law that penalizes companies for offshoring their money. If you want to be an American company, headquartered in America, then it should cost companies like Apple to offshore that money. Carrots and sticks should be used to bring that money back, but a lower corporate tax rate is a start, but not the solution.

They don't offshore money, they do profitable business in other countries and then don't want to pay taxes to move the proceeds to the US.

How are we going to pay for the great wall of Mexico again? No, I don't believe Mexico will pay for it...with cash I mean.

If I'm reading this right, I could make a partnership (LLC or S-corp) and use it for normal activities, investment, consulting, etc., and I'd pay 15% total. This is nuts. Heck, Uber and Lyft drivers could set up as passthroughs and save a bunch. This is nuts.

For the record: I think slashing the corporate rate is a good idea, but only if long-term capital gains are taxed high enough that the overall rate is reasonable.

The LLC would pay 15%, but then you would pay your normal individual rate on top of that: 10%, 25%, or 35%. If you selected the LLC as a pass through entity, you could avoid the 15% tax on the LLC, and would pay your regular individual rate.

That would be a tax increase (currently the LLC pays nothing), and I don't think it's what's proposed. From the article:

> Beyond cutting the tax rate to 15 percent for large corporations, which now pay a rate of 35 percent, Mr. Trump also wants that rate for a broad range of firms known as pass-through entities — including hedge funds, real estate concerns like Mr. Trump’s and large partnerships — that currently pay taxes at individual rates, which top off at 39.6 percent.

I think Trump really is suggesting that, when you have income reported on Schedule K-1, you would pay 15% tax on that income.

As I stated, there are two ways to tax an LLC: as a corporation (with a a separate proposed tax rate of 15%), and as a partnership (pass-through to taxpayer, no separate tax, taxpayer pays at individual rate). I posted the text of the plan, and there is no pass-through limit of 15%.

There are no pass-through limits in the current law. If there was a 15% pass-through tax limit, it would be absurd, because everyone in the 25% and 35% tax brackets would just form LLCs and get paid through that.

The Times is misconstruing the plan in order to give an absurd result, which they have done in the past with Trump.

No, that's not how taxes work in the US. Business taxes are before, and in addition to your income tax.

Single member LLCs get special treatment - you only pay personal income taxes and self employment taxes, but not business income taxes.

But let's talk about business income tax. Let's say you have a company that you own but do not work for (so I can skip payroll taxes). The company does $2,000,000 in sales at a cost of $1,700,000. The company has a profit of $300,000, which it currently pays corporate taxes of $120,000 on. After corporate taxes, you take home $180,000 in personal income. Then you pay personal income taxes of about $62,000 if you live in CA. You end up with $118,000 out of the original $300,000 profit.

This double taxation is a reason many people support ditching seperate corporate taxes altogether or at least lowering it substantially.

> No, that's not how taxes work in the US. Business taxes are before, and in addition to your income tax.

Businesses are either taxed as corporations (so they pay their own taxes and owners treat them as capital assets) or as partnerships (so their taxes are rolled into their owners' taxes but owners can distribute assets tax free).

Trump is talking about changing the tax code, and partnerships don't currently have a tax rate, since they don't pay the corporate tax. It sounds to me like his proposal is to lower the rate paid by their owners.

> Single member LLCs get special treatment - you only pay personal income taxes and self employment taxes, but not business income taxes.

Multi-member partnerships, too. AFAIK the only thing that's special about single-member partnerships is that they don't file separately. This has no major effect on taxes paid.

What the White House memo actually said was "15% business tax rate". I don't see anything in what the White House actually said about replacing personal taxes with business taxes.

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