Treasury Secretary Steven Mnuchin may have committed to a significant scale-down in the administration's tax reform plan Thursday in answering questions from Democratic Sen. Elizabeth Warren.
In a hearing before the Senate Banking Committee, Mnuchin said that big businesses would be excluded from President Trump's planned low special business tax rate.
In practical terms, that would mean that hedge funds, law firms, private equity funds and doctors' offices would not see a major tax cut.
In the versions of Trump's plan that were introduced on the campaign trail and in the administration's tax reform outline, those kinds of big businesses would be eligible for the 15 percent tax rate Trump pledged for "pass-through" businesses.
Pass-throughs comprise partnerships, LLCs, sole proprietorships, S-corporations and other businesses entities in which the business income passes through to the individual owners' tax returns and is taxed through the individual tax code. The Trump Organization itself is set up as a series of pass-throughs. Under the current code, that means a tax rate of up to 44.6 percent on paper.
Creating the new special tax rate could cut revenue by more than $1 trillion, according to calculations from outside think tanks. While much of that tax cut would accrue to one-man businesses and mom-and-pops, the bulk of it would benefit big businesses and high earners.
On Thursday, however, Mnuchin said that the reform would include rules to ensure that the cut was restricted to small businesses.
"There will be criteria as to whether you're eligible for the business tax if you're a pass-through," Mnuchin said during an exchange with Warren. "It will not be available to everyone."
Warren pressed him: "And you're going to limit this to small businesses?"
"Small and medium-sized businesses, yes," Mnuchin responded.
In a press release issued Thursday afternoon, Warren portrayed the exchange as a commitment from Mnuchin not to allow big companies to use the pass-through rate. A Treasury representative did not respond to a request for comment.
One complicating factor is that a related issue is preventing gaming of the special pass-through rate, which experts fear could be rampant. In particular, the concern is that professionals earning high salaries today could set up LLCs and claim that their salaries are really pass-through income. Mnuchin was eager to clarify that the tax reform would include strong rules to prevent such abuse.
Nevertheless, in the past Trump has called for ending a specific, related tax break for hedge funds.
That tax break is a wrinkle in the current tax code that allows private equity partners and some other investors to pay the capital gains tax rate, rather than the higher tax rate on labor income, on gains on their funds. Trump struck a populist note on the campaign trail by suggesting that "carried interest," as it's known, would be taxed at the higher income tax rate.
In Trump's envisioned tax reform, however, that preferential rate wouldn't matter. Hedge funds or private equity would benefit from the special 15 percent tax rate, lower than what they pay now.
Mnuchin's comments Thursday, however, suggest that those companies might not get a special rate after all.