Paul L. Caron

Saturday, September 3, 2016

NY Times:  If Trump Gets His Way, Real Estate Will Get Even More Tax Breaks

Trump (2016-2)New York Times: If Trump Gets His Way, Real Estate Will Get Even More Tax Breaks, by James B. Stewart:

It’s hard to imagine a tax code more favorable to real estate developers than the one we already have.

Donald Trump has come up with one.

Thanks to some major loopholes in the existing tax code that treat real estate developers as a special privileged class, it’s entirely possible (even likely) that Mr. Trump pays little or no federal income tax.

But Mr. Trump’s new tax proposal doesn’t just preserve those breaks, it piles on new ones for real estate developers like Mr. Trump himself — at an estimated cost of more than $1 trillion in tax revenue over a decade.

Moreover, this doesn’t count Mr. Trump’s more general tax cuts, which deliver the biggest windfalls to the highest earners. Many real estate developers would reap further gains from those provisions if they became law.

Even conservative Republican tax experts have denounced the specific real estate measures Mr. Trump has outlined.

“If you want to create a recipe for an abusive tax shelter, take those elements and bake for 15 minutes,” said Douglas Holtz-Eakin, an economist who served as director of the Congressional Budget Office and is now president of the American Action Forum, a conservative pro-growth advocacy group. He was also an economic policy adviser to former Republican presidential candidate John McCain. “It’s a phenomenal benefit for housing and commercial real estate interests.”

Let’s start with carried interest, a much-criticized tax loophole that allows private equity operators, hedge fund managers and real estate partners to convert ordinary income into capital gains, which are taxed at a lower rate. ... In what at first might seem a laudable effort to put the public interest ahead of his own financial gain, Mr. Trump called for abolishing the loophole. ...

But his fellow real estate investors and the Wall Street interests he lambastes needn’t worry. He’s offering them an even better tax break that renders carried interest irrelevant.

Mr. Trump has proposed a new rate — 15 percent on all corporate and business income — that is lower than the current capital gains rate of 20 percent on profits from the sale of assets, which is already well below the top tax rate on ordinary income of around 40 percent. The new lower rate would apply to “pass-through entities,” according to Mr. Trump’s plan, “Tax Reform That Will Make America Great Again.”

Pass-through entities pay no tax at the business level; as the name suggests, income is taxed at individual rates when it is distributed to the owners. Such entities include limited liability companies, or L.L.C.s, and sole proprietorships, S Corporations, and many partnerships. The conservative-leaning Tax Foundation estimates that they account for 60 percent of all business income in the United States. ... 

The Urban-Brookings Tax Policy Center estimated that lowering the rate on business income from pass-through entities to 15 percent would cost $1 trillion over 10 years. ... “The rich who already benefit from carried interest will get a big tax cut,” Mr. Holtz-Eakin agreed.

Mr. Trump already benefits from enormous depreciation benefits, which allow active real estate developers like him to use paper losses to offset other earned income. Mr. Trump’s proposals go even further, allowing for immediate write-offs rather than spreading them over several years. ...

The idea of immediately expensing capital investments rather than writing them off over time has many supporters among tax experts, including the Tax Foundation and Mr. Holtz-Eakin. Among other things, it simplifies the calculations and in theory would promote capital spending at a time it’s been lagging. But few, if any, support expensing capital investments while also allowing an interest expense deduction. ...

Steven M. Rosenthal, a veteran tax lawyer and senior fellow at the Urban-Brookings Tax Policy Center, put it in Twitter-like terms Mr. Trump might use: “Coupling an interest deduction with expensing is ridiculous.” Every other proposal to expense business investments, including the House Republican plan, limits interest deductions.

Political News, Tax | Permalink