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Mnuchin Nixes Passthrough Rate for Service Firms

Posted on September 13, 2017 by Stephanie Cumings, Jonathan Curry, Luca Gattoni-Celli

Treasury Secretary Steven Mnuchin September 12 reaffirmed the tax reform goal of giving all businesses a low statutory rate, but said it will not extend to service companies that are passthroughs, such as accounting firms, in order to prevent gaming.

Mnuchin said at the Delivering Alpha Conference in New York that the Trump administration is “absolutely . . .  still considering” making tax reform retroactive to the current year; that a slight rate decrease for high-income individuals would hopefully neutralize the loss of deductions such as the itemized one for state and local taxes; and that hedge funds would lose the carried interest tax benefit, although other, unspecified job creators may retain it.

Rules for passthroughs can be designed to prevent their use for tax avoidance and to stop them from adding to the deficit, Mnuchin said. “For one, services companies that are passthroughs will not get the benefit of the rate,” he said, adding that the goal is that money that is clearly income will be taxed at income rates. “If you are a business that’s creating manufacturing jobs, you’re going to get the benefit of that rate, because that’s going to be passed through to help create jobs and better wages.”

Mnuchin reiterated that hedge funds should lose the benefit of carried interest taxation, but that other entities that “create jobs” may retain it. He made similar comments recently at a forum in Louisville, Kentucky. Asked how the administration would manage the complexities of distinguishing between sectors, Mnuchin said, “The good news is we have over a hundred people at the Treasury working on this.”

“I know this issue is incredibly important to everybody in this room,” he added. “It's less important to the American public and creating jobs.”

He also said that the administration is still considering backdating tax reform to January 1, 2017, which he said would be a “big boon to the economy.”

Mnuchin said he’s hopeful that high-income taxpayers would get a slight federal rate decrease to help offset the repeal of the state and local tax deduction. He said taxpayers in states with high state and local taxes, like New York and California, would not see a tax decrease but hopefully wouldn’t see an increase either.

The secretary said both he and White House National Economic Council Director Gary Cohn would be meeting with the president that evening to discuss tax reform. He said he was “incredibly hopeful” that tax reform would be done by the end of the year. Mnuchin refused to say what corporate tax rate would be considered a “win,” noting that the president’s hopes for a 15 percent rate might not be feasible given budget concerns.

“As I said, this is a pass-fail exercise,” Mnuchin said. “So passing tax reform, which hasn't been done in 31 years, that’s a win. And what the exact number is, we’ll see.”

Details in Days, Not Weeks

White House Director of Legislative Affairs Marc Short acknowledged that while the Trump administration for now is sticking to its stated goal of reducing the corporate tax rate to 15 percent, the administration “understand[s] that ultimately, there’s probably [going to be] compromise to get the best deal.”

“It doesn’t help ourselves to negotiate against ourselves, and so I think that we should aim for what we think is best . . . we think that what’s best for the American people is a 15 percent corporate rate,” Short said, speaking at an event hosted by The Christian Science Monitor. Reducing the rate to 15 percent would make the United States more competitive internationally, bringing companies and jobs back to the country, he added.

As for whether the 15 percent rate would apply to passthrough businesses as President Trump has previously proposed, Short suggested that that is still the case, adding, “I think the details of that will be coming forward.”

Short said that the White House places more importance on lowering rates than allowing more generous expensing. “While we value the discussion on expensing, we want to prioritize getting rates down,” Short said, explaining that the White House considers lower rates to be more effective at boosting economic growth. The July 27 joint statement by the “Big Six” Republican leaders said that tax reform would include “unprecedented expensing.”

Short said that the Trump administration would be releasing new tax reform details “in a matter of days, not weeks.” The president’s call to accelerate the pace of tax reform progress shows that he “views this right now as our window to get this done,” Short said.

Short emphasized that getting at least some bipartisan backing for tax reform is a priority for the White House, noting Trump’s recent outreach to Democratic lawmakers such as North Dakota Sen. Heidi Heitkamp.

“We don’t feel like we can assume that we can get tax reform done strictly on a partisan basis, so it’s wise for us — not just from a policy perspective, but from a vote-counting perspective — to try to reach out and earn the support of Democrats as well,” Short said. Trump was scheduled to meet with a bipartisan group of senators for dinner later that evening.

Short dismissed assertions that Republican leaders like House Speaker Paul D. Ryan, R-Wis., and Senate Majority Leader Mitch McConnell, R-Ky., were opposed to Trump’s economic agenda, saying that the pair have been “terrific allies” on tax reform.

Rallying Small Businesses

U.S. Small Business Administration head Linda McMahon tried to rally support for tax reform as she appeared alongside U.S. Chamber of Commerce President and CEO Thomas J. Donohue at his group’s 2017 Small Business Summit in Washington.

Saying some summit attendees would soon be visiting Capitol Hill, Donohue asked McMahon what message they should take to lawmakers. “I would encourage all of you [to] continue to tell them how those taxes impact negatively the growth of small business,” she responded, citing what she called unfair taxes and complicated tax returns.

“Every business owner I talk to — as I’m traveling the country — without fail [has said] they would take the savings from the taxes that they are paying and reinvest in their business and hire more employees,” McMahon said. “And that’s, I think, a message that Congress cannot hear too often, over and over again.”

McMahon said her experience developing World Wrestling Entertainment Inc. from a small subchapter S corporation into a large C corporation helps her relate to small businesses’ concerns.

However, although she touted her “SBA Ignite Tour,” visiting her agency’s district offices and holding tax reform forums with local small business stakeholders, it was unclear how involved McMahon has been with the Trump administration’s tax reform effort. McMahon said she is gathering feedback in part to help calibrate the public messaging on tax reform.

“I have not seen a fully delineated tax proposal because I think it is still being worked on,” McMahon said when asked if the administration’s reform plan would distinguish small businesses’ interests from those of traditional corporations.

“I think that’s part of where they’re still in a bit of discussion,” McMahon continued, an apparent reference to the Big Six GOP tax reform negotiators including Mnuchin and Cohn. She noted that tax reform may lower individual statutory tax rates, alter income brackets, or make other changes including nearly doubling the standard deduction, to help accommodate more small businesses and simplify their filing.

“I’ve not seen a tax proposal specifically saying, ‘This is how small businesses operate,’ because small businesses by virtue of their nature, incorporated as passthroughs which they most all are, are going to have to see how the marginal tax rates are going to affect them,” McMahon said. “And that’s the best answer I have today.”

Donohue told the audience that tax reform will contain “a separate provision that incorporates the passthroughs, so you’ll be able to identify it and support it.”

Follow Luca Gattoni-Celli (@TheGattoniCelli) and Jonathan Curry (@jtcurry005) on Twitter for real-time updates.