The latest wrinkle in Donald Trump's tax plan cuts to the heart of a Wall Street crowd that has been one of the favorite demons of this presidential campaign.
Specifically, the revised top tax rate of 33 percent addresses a major criticism of his original plan, namely that the elimination of a tax dodge for private equity and hedge fund managers was in fact a ruse that would result in them paying little if any extra taxes.
At play is what's known as the "carried interest" exemption. Essentially, it allows big money managers to count earnings as capital gains instead of ordinary income. The tax implications are substantial: Capital gains currently carry a tax rate of 23.8 percent, while labor income is taxed at 39.6 percent. Closing the loophole would generate $17 billion in tax revenue over a 10-year period, the Congressional Budget Office has estimated.
Trump has said multiple times that he wants to get rid of carried interest, and he repeated that plan in his much-anticipated economic policy speech Monday in Detroit.
"The rich will pay their fair share, but no one will pay so much that it destroys jobs, or undermines our ability as a nation to compete," Trump said. "As part of this reform, we will eliminate the carried interest deduction and other special interest loopholes that have been so good for Wall Street investors, and for people like me, but unfair to American workers."
That's all well and good, except for one thing: Under the original Trump plan, that elimination of carried interest went along with a reduction in the top rate for income to 25 percent. So the tax rate private equity and hedge fund managers would pay would edge up only 1.2 percentage points even on the surface.
But when combined with a reduction of the tax rate for business income down to 15 percent, Trump's plan actually would reduce revenue, according to an analysis by the Brookings Institution's Tax Policy Center. (Brookings is a liberal think tank.) That's because those earning carried interest that are classified as partnerships would be taxed at the 15 percent rate.