President Trump has announced the new tax plan that would replace the existing 7 tax brackets to 3 tax brackets and reduce the business tax rate to 15%. Under the Trump tax plan, we might all want to become corporations to save a lot of money.
With the proposed corporate tax rate of 15%, high income earners can start their own corporations to avoid being taxed at ordinary income tax levels and to benefit from the 15% tax rate from small business pass-through income. That means any individual making more than $37,950 can use the small business pass-through income to realize a 10% – 24.6% tax break!
Neil Irwin explains on The New York Times:
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…
The opportunity to game the system arises from the huge gap between the tax rate paid on individual income — up to 39.6 percent now, or 35 percent under the Trump plan — and the low rate on business income the president proposes, of 15 percent. He seeks to apply that rate to all businesses, including “pass-through” organizations such as limited liability companies and S corporations, and that is where the opportunity for games arises.
For example, I am currently an employee of The New York Times, paid a salary every two weeks to write articles about economics. My earnings are labor income; I happen to be in the 28 percent tax bracket.
Suppose I instead formed Irwin Scribblings L.L.C., a “company” dedicated to providing economics writing services. Irwin Scribblings could then contract with The Times to provide articles about economics for a rate equivalent to the value of my current salary and benefits.
Under current law, I would pay the same taxes on that business income that I do on personal income. In important ways I would be worse off, as I would need to pay more of my own payroll taxes, wouldn’t have unemployment insurance, and would need to get health insurance through some channel other than my employer.
But under the Trump tax plan, my tax rate would fall to 15 percent from 28 percent, saving thousands of dollars a year — enough to justify those annoyances.
In summary, Trump’s tax proposal would reduce the corporate tax rate from 35 percent to 15 percent. Individuals who own a business can take advantage of the low pass-through tax rate.