What Is The Pass-Through Loophole?
The vast majority of businesses—from corner groceries to plumbing contractors to Wall Street law firms—are “pass-throughs” that don’t pay income taxes themselves like corporations do. Instead, profits and losses are passed through to the business owners, who pay any tax due on their personal returns at individual rates. The 2017 Trump-GOP tax law created a loophole that lets pass-through business owners deduct up to 20% of their income before figuring their taxes. It’s scheduled to expire at the end of 2025.
The Pass-Through Loophole Overwhelmingly Benefits Very Wealthy Big Business Owners Including Billionaires
The income from pass-throughs is highly concentrated at the top. One study found that 75% of it went to big businesses. That is why nearly two-thirds of the pass-through loophole’s benefits goes to households with incomes over $410,000 and households with over $1 million of income receive over half of the tax benefit. The average self-employed small business owner makes about $55,000.
One of the reasons the benefits are so skewed is that pass-throughs include very large businesses like Bloomberg, Fidelity Investments and practically the entire Trump Organization. In fact, seven billionaires, including Michael Bloomberg and packaging king Richard Uihlein, were able to cut their collective tax bills by almost $200 million in a single year thanks to the pass-through loophole. High-income people are more likely to have pass-through income; are more likely to have a lot of pass-through income; and get more per dollar of deduction because it is more valuable to people in higher tax brackets.
The Treasury Department estimated in 2010 that just one in four dollars in pass-through net income was earned by a real small business, and less than one in ten pass-throughs were both legitimately small and employed even a single worker. Another rigorous analysis by the Treasury Department and academic researchers found that 52 percent of the increase in the income share going to the top 1 percent from 1985-2021 came from higher pass-through business income.
Finally, the Treasury Department estimates that white households receive 90% of the deduction’s benefit, exacerbating the racial wealth gap.
The Pass-Through Loophole Wastes Billions That Could Be Used To Boost Real Small Businesses & Their Working-Family Customers
Permanently extending the pass-through loophole instead of letting it expire on schedule at the end of 2025 would cost over $700 billion in lost revenue in the first 10 years alone. That’s money that could instead be used to make Small Business Administration (SBA) loans, increase working-family tax credits, improve education and expand healthcare. Specifically, it’s enough money to provide free preschool for all 4-year-olds and expanded childcare for 16 million kids for 10 years, among many other possible combinations of public investments in working families.