- The 2017 Trump tax cuts cost the U.S. billions by making it easier for company owners to pay themselves in profits instead of wages.
- A wealth planner referring to the loophole said the goal “is to make you guys the bus drivers, or the truck drivers, to drive right through that hole with your clients.”
- Taxes on profits from certain types of businesses were cut dramatically, while the tax rate on salaries was only reduced slightly.
“In the months after President Donald Trump signed the Tax Cuts and Jobs Act in December 2017, some tax professionals grew giddy as they discovered opportunities for their clients inside a law that already slashed rates for corporations and wealthy individuals.
At a May 2018 conference of financial advisers, one wealth planner told the room that a key provision of the new law “leaves a gaping hole in the tax code.” As he put it, “The goal by the end of the presentation today is to make you guys the bus drivers, or the truck drivers, to drive right through that hole with your clients.”
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Among the tax-saving opportunities offered by the law: Taxes on profits from certain types of businesses were cut dramatically, while the rate on salaries those businesses paid was reduced only slightly.
That created an alluring opportunity. People who were both owners and employees of a company could make the same amount of money but change how they label it, by lowering their salaries and in turn increasing the company’s profits, which they shared in. That would reduce their tax bill by moving money from a high-tax category to a lower one: Wages are taxed at a top rate of 37% plus an additional 3.8% Medicare levy, while profits, under the new law, are taxed at a top rate of 29.6% (with no Medicare tax). Proponents of this provision claimed it would foster increased investment in American businesses (economists say it’s too early to determine whether that’s true). But even before the bill passed, prominent tax academics warned, in an article titled “The Games They Will Play,” that the tax break would be abused…”
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