Donald Trump uses only the best words, and one of the bestest of those best words is “rigged.” The election is rigged, the polls are rigged, the media are rigged, our trade deals are rigged, the economy is rigged. And he alone can change all that. He is our de-rigger de riguer.
But you know what it is really really rigged? Trump’s so-called “tax-reform plan,” the one that’s supposed to “Make America Great Again.”
The one that would eliminate the estate tax, thus saving the Trump family as much as $4 billion in taxes while saving 99.8 percent of American families exactly zero. The one that would also create a major new tax loophole for the wealthy, allowing them to pay income taxes at less than half the rate that they pay now, and at less than half the rate that most working stiffs would have to pay.
In fact, that proposed Trump loophole is such a beautiful example of rigging the system in favor of the wealthy that it demands a closer look, just to learn how such a thing can be done right in front of our eyes.
Let’s begin with the fact that under the Trump plan, the highest tax rate on individual income would drop from 39.6 percent to 33 percent. That in itself would provide a big tax cut for wealthy Americans, but it’s not where the real money is. No, it’s a little more sneaky than that. The real money comes from a special “pass-through” tax provision, affecting income that is “passed through” to individual taxpayers by legal entities such as S corporations, LLCs, partnerships and sole proprietorships.
For our purposes, you need to know two things about pass-through income and entities:
1.) Most pass-through income is earned by the wealthy. The Trump Organization, for example, is basically a collection of some 200 different legal entities that exist to pass through income to Trump and his family. According to the most recent studies, 69 percent of “pass-through” income is accrued by the wealthiest 1 percent of Americans.
2.) Under the Trump plan, “pass-through income” would no longer be taxed the same as the income that you and I get in our paychecks. Instead, it would be taxed at a special reduced rate of 15 percent, or less than half the rate as regular earned income. (A similar provision is included in the tax plan proposed by Paul Ryan and House Republicans.)
In other words, if you earn income through a paycheck, under Trump’s plan you’ll be taxed at a rate up of to 33 percent, with payroll taxes on top of that. However, if you can arrange to be paid that same income through a “pass-through entity,” you’ll be taxed at just 15 percent, with no payroll tax liability. That’s some sweet rigging right there.
And if you’d like an example of how that works in real life, I can accommodate you:
As part of the “supply-side” tax experiment in Kansas perpetrated under Gov. Sam Brownback, state taxes on pass-through income have been eliminated altogether. Today, if you earn $60,000 through a paycheck in Kansas, you pay a state income tax rate of 4.6 percent. If you get paid that same $60,000 through a pass-through entity, you pay a state income tax rate of zero.
As Brownback bragged four years ago, that and other changes were supposed to provide “a shot of adrenaline into the heart of the Kansas economy,” but it has failed abysmally to keep that promise. Growth in Kansas has lagged well behind the rest of the country, with one notable exception: The number of tax-free “pass-through entities” in the state jumped from 191,000 in 2012 to 334,000 at most recent count, and the amount of revenue lost through that loophole has helped drive the state into a deep financial crisis.
One of those Kansas pass-through entities is something called BCLT II, LLC, created by a man by the name of Bill Self. If you’re a college basketball fan, you probably recognize Self as the highly successful coach of the University of Kansas. He’s paid a nice salary of $230,000 by the state, but as NPR’s Kansas affiliate points out, that’s not how he gets the bulk of his compensation. Instead, Self has arranged to collect at least $2.75 million a year paid through BCLT II for “professional services rendered.” As a result, he pays zero state income tax on that money.
The vendor working the stands and selling soft drinks at a Jayhawks’ game pays a state income tax. The person collecting tickets pays a state income tax; the cop providing security pays a state income tax. But on the vast bulk of his income, Coach Self has legally arranged things so that he pays nothing.
To once again borrow one of the very best words, that is what “rigged” looks like. And it’s basically what Trump and the Republican Party want to do to the federal system as well. On your behalf, of course.