Examining GOP Pass Through Tax Cut Proposals By Nicky Riordan and Luke Perry

Examining GOP Pass Through Tax Cut Proposals By Nicky Riordan and Luke Perry

House Republicans will vote today on their tax cut bill. Reductions in pass-through income taxes is one important, but confusing, component of the bill.

Pass-through income is business income claimed on individual tax returns enabling business owners to be taxed at individual rates rather than corporate rates. The Senate bill seeks to reduce the pass-through rate to 32 percent, while the House bill seeks to reduce the rate to 25 percent.  

 Photo by J. Scott Applewhite/AP

Photo by J. Scott Applewhite/AP

Republicans argue the cuts are beneficial for small businesses, while opponents contend this tax cut predominately helps the most wealthy.

95 percent of businesses in America file their taxes via pass-through, so it is common, and not confined to conventional understandings of "small business." Larger businesses use it as well, including the Trump Organization, which owns an estimated 500 pass-through entities. It’s hard to say for sure because Donald Trump has not publicly disclosed his tax returns as presidents typically do.

Over half of pass-through income flows to the top 1 percent of tax payers, but an estimated 85 percent of pass-through businesses pay a 25 percent rate or less. This suggests that the most wealthy, and thus those with the highest individual tax liability of 39 percent, are the ones who would reap most of the benefit from reduced rates.

 Photo by J. Scott Applewhite/AP

Photo by J. Scott Applewhite/AP

The loss in government revenue will be accounted for either through increased debt or cuts in federal spending, or some combination. Projections surrounding economic growth, which vary, also factor into assessing the potential impact. 

How the policy particulars unfold remains to be seen. The House and Senate will need to pass their respective bills and reconcile the two in conference committee. The GOP is motivated and moving forward ambitiously with the hope of passing a tax cut law by the end of the month.

This article was updated at 9:45am on November 16, 2017.

 

Nicky Riordan (@nriordan120), Political Analyst, Utica College Center of Public Affairs and Election Research

Luke Perry (@PolSciLukePerry) is Chair and Professor of Government at Utica College.

 

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