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Tax Bill Littered With Loopholes for Wall Street’s Wealthiest

Supporters of the bill describe the change  as a boon for small business owners.Supporters of the bill describe the change  as a boon for small business owners.

Lawmakers who sped a bill through the US House last week may have handed a few more goodies to Wall Street’s wealthiest than they realize.

Investors in billion-dollar hedge funds might be able to take advantage of a new, lower tax rate touted as a break for small businesses. Private equity fund managers might be able to sidestep a new tax on their earnings. And a combination of proposed changes might allow the children and grandchildren of the very wealthy to avoid income taxes in perpetuity, Bloomberg reported.

These are some of the quirks that tax experts have spotted in the bill passed by the House on Nov. 16, just two weeks after it was introduced. Whether they were intentional or accidental, it will be up to congressional tax writers to keep or revise them before a final bill makes it to President Donald Trump’s desk—assuming both chambers can work out a compromise. Senate leaders plan to vote on their own version of tax legislation by the end of this month.

“There sure are a lot of glitches and loopholes, in large measure because there’s so much complexity in this bill that’s being raced through,” said Steven Rosenthal, a senior fellow with the Urban-Brookings Tax Policy Center, a Washington policy group.

Loopholes aside, the biggest features of the Republican tax plans in both chambers bear a mix of news for wealthy investors.

The good: a potential cut in the top marginal income tax rate; big cuts in business taxes; an end to the alternative minimum tax; and a cut or repeal of the estate tax.

The bad: limits or the outright end of individual deductions for state and local taxes and tax hikes on the debt financing that fuels private equity deals.

The loopholes are deep in the details. The House bill contemplates a major shift in how most American businesses are taxed. Right now, profits from “pass-through” entities, like sole proprietorships and partnerships, show up on their owners’ individual income taxes. The House bill replaces that with a new, 25% top tax rate on pass-throughs’ business income.

Supporters describe the change as a boon for small business owners, a way to keep them relatively even with corporations, which stand to see their tax rate drop to 20% from 35%.

The bill’s drafters probably didn’t mean for investors in partnerships like hedge funds to use the new pass-through rate, according to David S. Miller, a tax partner at Proskauer Rose LLP in New York. Capital gains, the kind of income these funds tend to generate, would be excluded.

 

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