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.
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.