November 22, 2019

THE PROMISE: SMALL BUSINESSES WILL RECEIVE A BIG TAX CUT

The large number of pass-through returns, [98 percent], are all $500,000 or less. Those people will get substantial reductions — small and medium-size businesses.”
– Treasury Secretary Steven Mnuchin, Nov. 17, 2017 [CNBC]

Source: Joint Committee on Taxation via Bloomberg https://www.bloomberg.com/graphics/2018-tax-plan-consequences/

Almost half of the benefits of this supposed “small” business tax cut are going to the tiny sliver of businesses with over $1 million in annual income. Less than a quarter is going to firms with income of $200,000 or less.

This tax break pertains to “pass-throughs,” which are unincorporated businesses ranging from corner groceries to big law firms. They don’t pay corporate income taxes. Instead, profits pass through to the owners who pay any tax due on their personal returns at individual rates. The Trump-GOP tax law allows (with many complex exceptions) owners of pass-throughs to exlude 20% of their business income from taxation. Such a deduction is more valuable the higher the tax bracket: it in essence lowers the top tax rate from 37% to under 30%.

Although most U.S. businesses are pass-throughs, their income is highly concentrated: 60% of this tax break will go to the richest 1% of taxpayers by 2024.