Trump’s ‘Small-Business’ Tax Cut Is Actually a Tax Cut for Trump and Fellow Millionaires

Seth Hanlon Senior Fellow, Center for American Progress

A tax proposal that President Donald Trump is describing as a tax cut for small businesses is actually a giant tax cut for millionaires, new model estimates from the Urban-Brookings Tax Policy Center show.

The proposal would provide massive tax windfalls for high-income owners of passthrough business entities, including President Trump himself. In light of this, perhaps a more appropriate name for the tax cut is the “Trump loophole.”

The tax plan released by the Trump administration on April 26 proposes capping the tax rate on passthrough business income to 15 percent. “Passthroughs” are business entities that do not pay the corporate tax, including S corporations, limited liability companies (LLCs), partnerships, and sole proprietorships. Currently, the owners of these entities pay tax directly on their profits at regular income tax rates, which range from 10 percent for people with a modest amount of taxable income to 39.6 percent for people with very high incomes. Therefore, Trump’s plan would slash the tax rate that millionaires and high-income people pay on passthrough business income by nearly 25 percentage points, from 39.6 percent to 15 percent—a massive windfall.

The Tax Policy Center’s new estimates* show just how skewed this tax cut is toward people at the very top of the income ladder:

  • 68 percent of the tax cut from the Trump loophole goes to millionaires, while less than 1 percent goes to taxpayers with annual incomes of less than $200,000.
  • Millionaires get an average tax cut of $114,000 from the Trump loophole. That is on top of the massive tax cuts they would get from the other parts of Trump’s plan, including cutting the corporate tax rate, cutting the top individual tax rate, and eliminating the estate tax. Nor does it include the windfall that millionaires would get from repeal of the Affordable Care Act.
  • 77 percent of the tax cut from the Trump loophole goes to the top 1 percent of income earners; the bottom 90 percent of taxpayers get less than 2 percent of the tax cut.
  • The top 1 percent get an average tax cut of $76,190—again, on top of other massive tax cuts they would receive under President Trump’s plan. The top 0.1 percent would get an average tax cut of $362,630.

The Trump loophole would reduce revenue by $1.4 trillion over the next 10 years, according to the Tax Policy Center—meaning that millionaires would receive a tax cut of nearly $1 trillion from this one policy alone.

And that estimate does not even reflect the fact that the Trump loophole would cause massive tax avoidance, as high-income people could recharacterize their wages and salaries as passthrough business income to take advantage of the special 15 percent rate. The Tax Policy Center estimates that such tax avoidance could increase the revenue loss from $1.4 trillion to nearly $2 trillion over 10 years. The organization also notes that by prompting business owners to recharacterize income as profits rather than wages, the special passthrough rate could reduce the payroll revenue that goes into the Social Security and Medicare trust funds. This would hasten the depletion of those funds and put those vital programs at greater risk.

The Trump loophole, the Tax Policy Center estimates show, is not aimed at actual small businesses. The passthrough businesses that would benefit the most from the president’s proposal include hedge funds and other investment partnerships; large S corporations, including some of the nation’s biggest companies; global law firms and accounting firms; and other large businesses—including The Trump Organization, which is an agglomeration of more than 500 passthrough entities.* The Trump loophole would slash the rate that the president pays on his income from The Trump Organization from 39.6 percent to 15 percent.

Meanwhile, most small-business owners are already in the 15 percent tax bracket or lower—so they would not benefit at all from the Trump loophole. Prior Tax Policy Center estimates found that more than two-thirds of all passthrough business owners are in the 15 percent tax bracket or lower.

In sum, the Trump loophole is not a policy aimed at actual small businesses. It is yet another tax windfall for millionaires.

***

Reposted from CAP.

Posted In: Allied Approaches

Union Matters

The Big Drip

From the USW

From tumbledown bridges to decrepit roads and failing water systems, crumbling infrastructure undermines America’s safety and prosperity. In coming weeks, Union Matters will delve into this neglect and the urgent need for a rebuilding campaign that creates jobs, fuels economic growth and revitalizes communities. 

A rash of water main breaks in West Berkeley, Calif., and neighboring cities last month flooded streets and left at least 300 residents without water. Routine pressure adjustments in response to water demand likely caused more than a dozen pipes, some made of clay and more than 100 years old, to rupture.

West Berkeley’s brittle mains are not unique. Decades of neglect left aging pipes susceptible to breaks in communities across the U.S., wasting two trillion gallons of treated water each year as these systems near collapse.

Comprehensive upgrades to the nation’s crumbling water systems would stanch the flow and ensure all Americans have reliable access to clean water.

Nationwide, water main breaks increased 27 percent between 2012 and 2018, according to a Utah State University study.  

These breaks not only lead to service disruptions  but also flood out roads, topple trees and cause illness when drinking water becomes contaminated with bacteria.

The American Water Works Association estimated it will cost at least $1 trillion over the next 25 years to upgrade and expand water infrastructure.

Some local water utilities raised their rates to pay for system improvements, but that just hurts poor consumers who can’t pay the higher bills.

And while Congress allocates money for loans that utilities can use to fix portions of their deteriorating systems, that’s merely a drop in the bucket—a fraction of what agencies need for lasting improvements.

America can no longer afford a piecemeal approach to a systemic nationwide crisis. A major, sustained federal commitment to fixing aging pipes and treatment plants would create millions of construction-related jobs while ensuring all Americans have safe, affordable drinking water.

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There is Dignity in All Work

There is Dignity in All Work