Trump’s presidency is nothing if not controversial. And while no one is surprised that Democrats already oppose his tax plan, the GOP isn’t exactly united on that front either. Yes, it generally supports traditional Republican ideals, but with Tea Party members and more liberal elephants, a consensus within one party might be out of reach.
Some might breathe a sigh of relief, as Trump’s tax plan does significantly benefit the upper brackets. Others, many small business owners among them, are agitated over the stall.
Their theory is that the less they pay in taxes, the more money that they will have to reinvest in the business, though recent events in Kansas suggest otherwise. However, it would be wrong to look to one state to serve as an example for how Trump’s tax plan would affect the entire country.
It would be nice to have a model to look to, especially as this tax plan promises to not only have significant impacts on large corporations, but small businesses as well.
Law firms fall in both categories, and their growth would help out a significant chunk of the population. More and more law students graduate every year into a job market that cannot support them.
These are some of America’s best and brightest, but instead law school graduates are some of the most underemployed in our nation.
As anyone with experience in the legal field will tell you, there is always work to be done, whether you are working at a multinational firm or a one-man-show in rural South Dakota. It’s just there’s no extra money to pay for these graduates’ employment. If tax reductions really do benefit small businesses and their communities, then law firms should definitely be paying attention to Trump’s tax developments.
Trump’s plan centers on cutting taxes for all, but one of the biggest reforms is slashing business rates to 15 percent. Currently, most small businesses are pass-through entities, meaning that they don’t pay corporate tax rates. Instead, they are taxed through the individual owner’s income. Regardless, under Trump’s plan, both of these businesses would be treated the same.
Corporate tax rates are currently 35 percent, although most corporations take advantage of various deductions to pay an average of 19 percent. Some particularly large companies can get away with paying nothing at all. Since there are already plenty of avenues to lower the amount that businesses owe, chopping the corporate tax rate by 20 percent seems drastic to some.
However, the plan clearly appeals to small business owners. Although there are plenty of deductions available to small businesses as well, it’s harder to get away with paying nothing at all. With pass-through entities, the owners pay through their individual income tax, which can be higher than the corporate rate as is. This is hardly fair if corporations tax rate is lowered, so small businesses’ rates would also be lowered accordingly.
Possible Outcomes for Law Firms
Of course, the one that Trump’s supporters and many small business owners are hoping for is an increase in revenue, but that is far from a sure thing. However, this is a debate that has been going on for far too long to be solved in a single article or blog post. Trump’s plan, while not altogether developed, has some interesting implications for law firms.
There is potential for this plan to be abused. Because Trump’s tax plan doesn’t differentiate between the mom and pop shop on the corner, the freelance writer in mom’s basement, or a multinational corporation (at least not presently), some economists believe that white collar entrepreneurs will claim their income through fake pass-through entities instead of their individual income tax.
Since most pass-through entities are owned by white-collar professionals, it’s easy to see how this option could be particularly enticing to small law firms.
Businesses, no matter their size, have repeatedly tried to circumvent taxes, whether by hiding behind nonprofits or holding profit overseas. Law firms are likely not above such a tactic; they are just better at hiding it.
In fact, considering that most law firms are small businesses, a lawyer is unlikely to arouse suspicion by claiming through a pass-through entity, regardless where he or she is employed. While this sort of loophole is easily foreseeable, regulating any sort of preventative measures would be difficult.
However, precisely because most law firms are small businesses, this might not lead to the hiring boom for law graduates alluded above.
A miniscule percentage of small law firms would be considered “high growth” enough to impact the economy and hire more employees. What is more likely is that the owners of individual law firms will save themselves a considerable chunk of change from Trump’s tax plan, but it will fail to boost the hiring prospects of law students. Not to mention, it will cost the government a pretty penny in lost tax revenue.
Supporting Trump’s tax plan is a difficult decision. It is likely to benefit sole proprietors and owners of smaller law firms all together; those who own larger law firms could definitely benefit by forming pass-through entities.
Lawyers for large corporations have the means to form these entities and often the finances to motivate them to do so. So while Trump’s tax plan is likely to help individual lawyers, it is unlikely to help new ones enter the profession as a whole.
An immediate, short-term benefit is hard to say “no” to there is only a chance of a negative consequence in the future. Ultimately, it is a weighted choice, with no obvious answer.
Brooke Faulkner is a law and math nerd from the pacific northwest. One of her life goals is to bridge the gap between numbers and the public by advancing STEM education in public schools and discussing economic policy at the dinner table.