The Republican tax plan claims to be helping small businesses with a new loophole that’s actually tailor-made for the rich. The loophole is a new 25 percent top tax rate for pass-through businesses. Pass-through businesses are those that retain no earnings and pay no taxes at the business level. Instead, all profits are “passed-through” to the business owners, who then pay their individual income taxes, just like you and me.
This means that while almost all genuine small businesses are pass-throughs, not all pass-throughs are genuine small businesses. For example, pass-through income has exploded in recent decades, and most of this increase is not attributable to mom-and-pop stores, but to hedge funds and law firms and private equity partners. In fact, 49 percent of all pass-through income goes to just the top 1 percent of households. This makes pass-through income one of the most concentrated-at-the-top income categories in the entire economy.
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This also means that the only straightforward tax cut provided by the loophole proposed in recent Republican tax plans is for rich households, not most small businesses. For example, take a married couple whose small restaurant made them $150,000 in net profits. They will not be helped by this proposal because they’re already paying a 25 percent marginal income tax rate. 86 percent of households with pass-through income already pay 25 percent or less, so will see nothing from this Republican tax plan. The people this pass-through loophole helps wealthy people like President Trump, whose top tax rate on income from more than 500 pass-through businesses would fall from 39.6 to 25 percent.