As the House and Senate continue to try to reconcile their two versions of a tax plan, the taxing structure for pass-through entities (s-corps, LLC’s, etc.) continues to be somewhat controversial, if not completely nonsensical. As we pointed out last week, the Senate bill somewhat randomly chose to exclude pass-through entities organized as family trusts from tax cuts which would ultimately leave them on the hook for much larger tax bills due to the elimination of other deductions. It’s unclear whether this bizarre exclusion was just an oversight or an intentional political hit on an easy target that no one in Washington DC would dare defend publicly: rich families organized as trusts.
Now, a new note from the Tax Policy Center lays out some scenarios whereby the marginal tax rate for high-income pass-through entities could soar to over 100%. Of course, while two rational people can debate the impact of a ~40% tax rate on a person’s desire to work, we’re almost certain that a taxing structure that takes more than 100% of your marginal income will be a slight disincentive. Here’s an example of how it works from the Wall Street Journal:
Consider, for example, a married, self-employed New Jersey lawyer with three children and earnings of about $615,000. Getting $100 more in business income would force the lawyer to pay $105.45 in federal and state taxes, according to calculations by the conservative-leaning Tax Foundation. That is more than double the marginal tax rate that household faces today.
If the New Jersey lawyer’s stay-at-home spouse wanted a job, the first $100 of the spouse’s wages would require $107.79 in taxes. And the tax rates for similarly situated residents of California and New York City would be even higher, the Tax Foundation found. Analyses by the Tax Policy Center, which is run by a former Obama administration official, find similar results, with federal marginal rates as high as 85%, and those don’t include items such as state taxes, self-employment taxes or the phase-out of child tax credits.
This post was published at Zero Hedge on Dec 11, 2017.