Corporations are people, Mitt Romney once told us. But if the Trump administration’s tax plan were to become law, in the future a whole lot of people may just become corporations.
That’s because of a huge loophole implied by the broad tax ideas the administration recently released. Unless revised in actual legislation, the plan would give millions of Americans the opportunity to cut their taxes by essentially turning themselves into small business entities.
This mind-bending curiosity of the tax code could undermine the very idea of a job as we know it — or, arguably, accelerate a shift that has been underway for years.
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This is no abstraction. After Kansas eliminated its state tax on pass-through income, the number of people taking advantage of the exemption soared, leading to hundreds of millions of dollars in lost revenue for state coffers.
Pass-through entities include a variety of corporate structures with one thing in common. They do not pay federal income tax directly, but rather pass their earnings along to their owners, who in turn pay individual income tax on the money. That avoids the problem of double taxation faced by C corporations (the structure most commonly used by the biggest companies), which pay the corporate income tax directly and whose investors must pay taxes on dividends they receive.
But if the tax code is changed to lower the corporate income tax rate to 15 percent, from its current 35 percent, that creates a different fairness problem. Suddenly C corporations would have much lower tax rates than competitors that happen to be organized using pass-through structures, such as S corporations and limited liability companies.
