Lottery Luck in the Tax Proposal

The new Republican tax plan has a lot of people up in arms. Mostly rightly so, but I had a realization today about just how bad it was. Imagine a hypothetical winner of a $100 million lottery. That’s a nice payday and the taxman comes along for his share. The IRS, under the current regime, takes 39.6% of that, or $39.6 million dollars. Of course, if one is wise, one calls a lawyer first, who sets up a pass-through entity, like a limited liability company or a subchapter-S corporation. But that’s just a matter of doing business.

Now, under the proposed tax plan, there’s a change for pass-through entities. Under the proposed change, pass-through income would only be taxed at 25%, regardless of bracket. So our lottery winner pays $39.6 million in taxes, unless the winner pays $100 to start an LLC,¹ then the tax bill is only $25 million. A small $100 dollar investment yields an immediate return of $14.6 million.

That’s one lucky lottery winner.