The Trump administration’s proposal to slash tax rates on so-called pass-through businesses would deliver a windfall to investors in master limited partnerships and could offer a much-needed lift to this niche segment of the energy market.
The tax plan outline released on Wednesday by U.S. President Donald Trump would sharply slash business taxes and discount the rate on overseas corporate profits brought back into the United States.
The proposed changes include a cut to the top tax rate on pass-through businesses to 15 percent from the current rate of up to 36.9 percent. Pass-throughs get that name because taxes are not paid by the business itself but pass through to their owners’ individual taxes, at that rate.
The change would largely benefit owners of private businesses, but U.S. stock market investors holding shares of master limited partnerships, or MLPs, would receive the same treatment. MLPs build the pipelines and storage tanks and are a common corporate structure in the oil and gas infrastructure sector.
Trump U.S. tax plan will not manage to pay for itself with growth
President Donald Trump’s tax-cut plan will generate growth, but not nearly enough to replace trillions of dollars in lost revenues, while rising deficits could even take back some of the economic gains.
Core principles of the plan, unveiled on Wednesday, rely heavily on so-called “dynamic scoring,” a budget analysis method that assumes tax cuts will boost economic activity, thus generating more revenues.
Such assumptions have been at the heart of Republican tax orthodoxy since Ronald Reagan used them to justify massive tax cuts in 1981 that were derided at the time by critics as “voodoo economics.”
On Wednesday, Treasury Secretary Steven Mnuchin said Trump’s plan would “pay for itself with growth” and closing of some deductions and credits.
From the details released so far, Maya MacGuineas, who heads the Committee for a Responsible Federal Budget (CRFB), said the plan could add $3 trillion to more than $5 trillion to the federal deficit over five years.
“No credible dynamic score is going to show that this bill is paid for,” MacGuineas said. “The growth effects, which are real and important, add decimals of percentage points to growth, not full percentage points.”
Her budget watchdog group estimates that to pay for the plan, U.S. growth would need to be sustained at 4.5 percent annually, a level not seen on a sustained basis since the late 1960s and early 1970s.
The plan to slash business taxes seen as ‘guidepost’ by congressional Republicans
Trump’s fellow Republicans in Congress generally welcomed but viewed as an opening gambit.
The Trump administration touted the president’s blueprint as a landmark proposal just days before Trump marks his 100th day in office on Saturday.
While Republicans, who control the House of Representatives and the Senate, have long eyed tax cuts, Trump’s proposal may be unpalatable to party fiscal hawks. It lacks plans for raising new revenue and could potentially add billions of dollars to the federal deficit.
The planned cuts would pay for themselves through economic growth, and by reducing tax deductions and closing loopholes, Mnuchin said.
“Our objective is to make U.S. businesses the most competitive in the world,” he said. “The president is determined to unleash economic growth for businesses.”
House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell and the top Republicans on the congressional tax-writing committees welcomed the proposals, while leaving space for details to change as legislation evolves.
“The principles outlined by the Trump Administration today will serve as critical guideposts” as Congress and the administration work on changes to taxation, they said in a statement.
Senior Democrats assailed the plan, including its underpinning ideology of “trickle-down” economics.
Ron Wyden, the top Democrat on the Senate tax committee, called it “unprincipled” and said it would produce tax cuts for the wealthy, conflicts for the president because of his own business interests, “crippling debt for America and crumbs for the working people.”
U.S. stocks pared gains on Wednesday after the plan was unveiled. While Wall Street has been optimistic about the prospect of corporate tax cuts since Trump’s election in November, the stocks rally has stalled lately because of a lack of clarity about Trump’s policies and concern over his failure to push through a healthcare bill.
Some analysts said investors were aware of the long road ahead before any tax bill is passed.
Trump’s plan would cut the income tax rate paid by public corporations to 15 percent from 35 percent and reduce the top tax rate assessed on pass-through businesses, including small partnerships and sole proprietorships, to 15 percent from 39.6 percent, the White House said.
While public corporations’ profits or losses are taxed directly, “pass-through” businesses are taxed under the individual income tax code.
Mnuchin also said that Trump was proposing that corporations bring offshore profits into the country at a rate well below the current 35 percent rate. He did not say what that rate would be, but said the administration was working with Congress on a low rate.
About $2.6 trillion in profits are being held tax-exempt abroad by U.S. multinationals under a rule that says they are only taxable if brought into the United States, or repatriated. Trump proposes requiring repatriation, but at the lower rate.
If enacted, the measure would produce a one-time surge in revenue that could be dedicated to infrastructure spending, an idea that could attract votes from Democrats.
For individual U.S. taxpayers, the Trump plan would simplify tax returns by reducing the number of tax brackets to three (10 percent, 15 percent and 35 percent) from seven and double the standard deduction available to taxpayers who do not itemize their deductions.
‘Fist bumps’ at hedge funds over Trump’s tax plan
U.S. hedge fund managers began warming to President Donald Trump soon after his surprise election ignited a powerful stock market rally. Now, his dramatic tax cut plans give them even more reasons to cheer.
Trump, looking to make good on pledges for sweeping tax reform, on Wednesday unveiled plans for a cut in the tax rate to 15 percent for so-called pass-through businesses. While the proposal is being billed as a boon for small businesses from pizzerias to investment management firms, one clear winner looks to be the hedge fund set, where owners can earn hundreds of millions in income a year, tax experts, managers, and their lawyers said on Wednesday.
“For hedge funds, this is an unmitigated benefit as their tax liabilities could drop significantly,” said Robert Willens, an independent tax consultant. “Obviously, they are quite enthusiastic and there may be a few fist bumps along the way.”
A manager whose hedge fund earns $50 million a year, for example, would be paying some $19.8 million in taxes, or 39.6 percent, under the current rules. That could drop to as little as $7.5 million if the rate were cut to 15 percent.
To be sure, Trump’s plan has a long, hard road to becoming reality, but that didn’t stop fund managers from blitzing their tax lawyers with calls about how to play it. Most attorneys advised patience, saying they would need to wait at least until early June, when a bill with more specific language might be hammered out.
Fed, wary of inflation, could lean against Trump tax cut
The plan, if approved in the form Trump officials outlined on Wednesday, could add inflationary fuel to an economy already running near full capacity, a risk Federal Reserve officials have been warning about since Trump got elected.
Confronted with the prospect of massive cuts that would slash the corporate tax rate to 15 percent from 35 percent and overhaul the personal tax code, Fed officials will need to start debating if they can maintain a measured pace of rate hikes or they might need to move faster, say analysts and economists who follow the U.S. central bank.
The Fed aims to hold inflation at around 2 percent, and is close to that threshold, with its target short term rate expected to rise two more times, to about 1.5 percentage points, by the end of the year.
Uncertainty as to whether and in what shape the plan will get implemented adds to other challenges the Fed faces in trying to chart its course over the next several months.
Companies cheer Trump tax cuts, but jobs are less certain to follow
U.S. businesses would reap a windfall if President Donald Trump’s plan to cut corporate tax rates and slash taxes on cash parked overseas becomes law, but it was unclear whether they would stimulate a surge in investment and job creation in return.
Under Trump’s proposals, American companies would move from being the most highly taxed among the Group of 20 countries to among the lowest. Tax rates would fall below those of neighboring Mexico and Canada, which Trump has accused of shortchanging the United States in trade deals.
Corporate leaders and business lobbying groups such as the U.S. Chamber of Commerce on Wednesday cheered the administration’s tax proposals, while allowing that the initial one-page plan left out crucial details.
The tax plan, which includes a cut in taxes on public companies to 15 percent from 35 percent, does not detail cuts in spending that would help keep the budget deficit under control.
A Mixed Bag
The financial impact of the White House tax plan will vary widely by company and business sector. A proposal to cut inheritance taxes, for example, is of high interest to auto dealers, which are often family-controlled enterprises.
Many companies already pay less than the headline 35 percent tax rate. Companies in the S&P 500 index paid an average tax rate of 29.06 percent for 2016, Standard and Poors said.
While the tax cuts may produce a short-term boost to the economy and add fuel to a stock market rally, it falls short of the comprehensive tax reform that Trump had pledged earlier.
Last but not least
The No. 2 Democrat in the Senate, Dick Durbin, attacked the tax proposal and the fact Trump, a wealthy New York real estate developer, had declined to make public his personal tax returns.
“President Trump should release his own tax returns if he wants to have any credibility in a debate about America’s tax code,” Durbin said. Mnuchin said on Wednesday that Trump did not intend to release his tax returns.
Understanding Trump Tax Cuts Program Pro & Cons: how could President Donald Trump’s plan to slash business and household taxes shift the U.S. economy?