Politics
Out of context: Reply #28778
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Republican Leadership Tax Plan’s Pass-Through Tax Break Would Provide Massive Windfall to the Wealthy
A key reason why the tax plan that the Trump Administration and congressional Republican leaders released in September is costly and heavily tilted to the wealthiest households is its special, much lower top rate for “pass-through” business income.[1] This is income from businesses such as partnerships, S corporations, and sole proprietorships claimed on individual tax returns — that is, it “passes through” to the business owners and is taxed at the owners’ individual tax rates (the same rates that apply to wages and salaries). These businesses already have the advantage of being exempt from the corporate tax on profits and taxes on dividends. Under the September Republican tax plan, pass-through income would be taxed at no more than 25 percent — far below the 39.6 percent top individual income tax rate that now applies to pass-through income, or the 35 percent top rate that would apply to individual income under the GOP plan. This would provide a massive windfall to the very wealthy and has sometimes been referred to as the “Trump loophole” because Donald Trump exemplifies the type of business owner whom it would most benefit. (See Box 1.)
The GOP tax plan as a whole would cost well over $2.4 trillion over a decade and would cut millionaires’ taxes by $200,000 in 2018, on average. The pass-through provision is a prime driver of that cost and regressive tilt. Tax Policy Center (TPC) analyses[2] of plans to reduce the pass-through rate to 25 percent show:
The pass-through rate cut would cost about $770 billion over ten years, accounting for a significant share of the overall tax plan’s cost.
About 80 percent of the tax cut on existing pass-through income would flow to households with incomes over $1 million. Their tax cuts would average roughly $50,000 apiece in 2018, boosting their after-tax incomes by more than 2 percent.[3] This extreme tilt reflects the fact that the bulk of pass-through income flows to high-income households and that they would get a larger tax break on each dollar of pass-through income (because they are in higher income tax brackets).
The provision would create major new opportunities for tax avoidance. An estimated $130 billion of the $770 billion total cost would come from high earners reclassifying their non-business wage and salary income as pass-through income to take advantage of the lower rate, according to TPC.[4] In fact, the revenue losses due to tax avoidance would easily exceed the provision’s total tax cuts for the bottom 99 percent of the population.