The so-called “small” business tax cut in the Trump-GOP tax plan, which would lower the business tax rate from 39.6% to 25%, is a fake because it will primarily benefit wealthy businesses, such as Wall Street hedge fund managers, big law firms and real estate developers like Trump.
The new 25% tax rate would benefit pass-through businesses, which include sole proprietorships, partnerships, limited liability corporations (LLC’s) and S corporations. These businesses pay no federal income taxes as a business, unlike typically larger businesses known as C corporations. Instead, their profits and losses pass through to their owners, who pay their business taxes on their personal tax returns at individual tax rates, which range from 10% to 39.6%. Pass-throughs are the most common form of business, although only 14% of pass-through business owners would benefit from this tax cut because most businesses already pay a rate of 25% or less.
Up to about 17% of the revenue loss will be due to tax avoidance and cheating. High-income individuals will shift from being employees for tax purposes to being a business, so their salaries or wages can be reclassified as pass-through income subject to the low 25% tax rate.
Trump’s business tax cut will overwhelmingly benefit the wealthy—hedge fund managers; rich lawyers, doctors and dentists; and real estate developers like Trump.
According to the Tax Policy Center:
- Just 14% of business owners and only 4% of all taxpayers would get this tax cut.
- The top 1% will get nearly 90% of this tax break—an average tax cut of $32,500 each year. That’s because the top 1% gets more than half of all pass-through income (52.3%).
- Just 3% of households in the middle of the income distribution would get a tax cut, averaging $650; 2% of households in the middle would pay $600 more in taxes.
- A large share of pass-through income flows to Wall Street. In 2011, 70% of partnership income went to the financial industry and related holding companies.
This business tax break is known as the “Trump Loophole” because the president will benefit enormously from it, as he generates most of his income from pass-through businesses.
- The Trump Organization, from which President Trump generates his income, is made up of more than 500 pass-through entities, according to his lawyers. It is not a small business. It was the 48th largest U.S. private company in 2016, with 22,450 employees and $9.5 million in revenues.
- If the Trump Loophole becomes law, the president will pay the same 25% tax rate that a small business owner making $80,000 a year on Main Street would pay, as shown in the table. A married couple making $450,000 a year as a pass-through business could cut their tax rate from 35% to 25%. This begs the larger question about tax fairness: Why should that couple be able to pay a 25% tax rate whereas another couple making $200,000 in wages or salaries would pay a 28% tax rate?
|Income Tax Rate||Income Threshold for Individual Taxpayers||Income Threshold for Married Taxpayers Filing Jointly|
|39.6%||Over $418,400||Over $470,700|
|35%||$416,700 – $418,400||$416,700 – $470,000|
|33%||$191,650 – 416,700||$233,350 – $416, 700|
|28%||$91,900 – $191,650||$153,100 – $233,350|
|25%||$37,951 – $91,900||$75,901 – $153,100|
The GOP’s $770 billion business tax cut benefitting the wealthy is more than double the $346 billion cut to education, training, employment, and social services proposed in Trump’s 2018 budget.
- Deep cuts to K-12 education and college financial aid, eliminating subsidized loans helping 6 million students afford college each year.
- Elimination of after-school and summer programs for almost 2 million students.
- Cuts to job training and employment services, depriving 570,000 people of help in 2018.
- Elimination of funding for Special Olympics education.
- Cuts to support for child care, Head Start, and other early childhood education services.
 TPC, Table T17-0078 – “Sources of Flow-Through Business Income by Statutory Marginal Tax Rate; Current Law, 2017” (March 2017). http://www.taxpolicycenter.org/model-estimates/distribution-business-income-march-2017/t17-0078-sources-flow-through-business
 TPC, “A Preliminary Analysis of the Unified Framework” (Sept. 29, 2017), Table 1. http://www.taxpolicycenter.org/sites/default/files/publication/144971/a_preliminary_analysis_of_the_unified_framework_0.pdf
 Ibid. See note (a).
 TPC, Table T17-0078
 TPC, “Options to Reduce the Taxation of Pass-through Income” (May 15, 2017), p. 8. http://www.taxpolicycenter.org/sites/default/files/publication/141541/options-to-reduce-the-taxation-of-pass-through-income.pdf
 TPC, T17-0080 – Sources of Flow-Through Business Income by Expanded Cash Income Percentile; Current Law, 2017 (March 20, 2017). http://www.taxpolicycenter.org/model-estimates/distribution-business-income-march-2017/t17-0080-sources-flow-through-business
 TPC, T17-0166 – Distributional Effect of a 25-Percent Top Rate on a Broad Definition of Pass-Through Income, Baseline: Current Law with AMT Repealed and 12/25/33 Rate Structure, by Expanded Cash Income Percentile, 2018 (May 15, 2017). http://www.taxpolicycenter.org/model-estimates/options-taxing-pass-through-income-prefential-rates-may-2017/t17-0166-distributional
 Department of the Treasury, Office of Tax Analysis Working Paper 104, “Business in the United States: Who Owns It and How Much Tax Do They Pay?” (Oct. 2015), Fig. 4, p. 34. https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/WP-104.pdf
 Sheri A. Dillon and William F. Nelson, Morgan, Lewis & Bockius LLP, “Re: Status of U.S. federal income tax returns” (March 7, 2016). http://americansfortaxfairness.org/wp-content/uploads/Trump-tax-attorney-letter.pdf
 CNN Money, “Trump Organization is now America’s 48th largest private company” (Dec. 15, 2016).
 Forbes, “IRS Announces 2017 Tax Rates, Standard Deductions, Exemption Amounts And More” (Oct. 25, 2016).
 The New York Times, “How Trump’s Budget Would Affect Every Part of Government” (May 23, 2017).
 Center for American Progress (CAP), “How the Trump Budget Threatens the American People” (May 26, 2017). https://www.americanprogress.org/issues/economy/reports/2017/05/26/433065/trump-budget-threatens-american-people/
 NPR, “Under Trump Budget, Nearly 2 Million Kids May Lose After-School Care” (May 2, 2017). http://www.npr.org/sections/ed/2017/05/02/526452564/under-trump-budget-nearly-2-million-kids-may-lose-after-school-care
 CAP, “Trump Budget.”
 The Washington Post, “Here are K-12 education programs Trump wants to eliminate in 2018 budget” (May 18, 2017). https://www.washingtonpost.com/news/answer-sheet/wp/2017/05/18/here-are-k-12-education-programs-trump-wants-to-eliminate-in-2018-budget/?utm_term=.a8487f3b48c9
 National Women’s Law Center, “Trump Budget Would Reduce Families’ Access to Early Care and Education” (July 2017). https://nwlc.org/wp-content/uploads/2017/08/Trump-Budget-Would-Reduce-Families-Access-to-Early-Care-and-Education-Final.pdf