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Will New Trump Tax Plan Include Pass-Through Tax Break for Wealthiest?

February 27, 2017

President Trump says he will revise his tax plan.[1] A key question is whether the revised plan will tilt heavily toward the wealthy — as his campaign tax plans did — or will reflect his and his top aides’ promises that his tax policy will focus on workers and “have no absolute tax cut for the upper class.” [2]  The answer depends heavily on whether he retains a proposal for a special, much lower top rate for “pass-through” business income.

 “Pass-through” income is business income that individuals receive from businesses other than corporations and claim on their individual tax returns.[3]  That is, the income “passes through” to the business owners and is taxed at the owners’ individual tax rates — the same rates that apply to their wage and salary income — rather than through the corporate income tax.

Under the Trump campaign plan, that income would be taxed at no more than 15 percent — far below the 39.6 percent top rate that now applies to wage and salary income and pass-through income.  The 15 percent rate for pass-through income would provide a massive windfall to the very wealthy and has sometimes been referred to by some as the “Trump loophole” because Donald Trump exemplifies the type of business owner who would benefit from it the most. (See Box 1.)

Analyses by the Urban-Brookings Tax Policy Center (TPC) found that the final version of the Trump campaign tax plan would give nearly half of its total tax cuts to people making over $1 million a year — boosting their after-tax incomes by an average of 14.3 percent — while the bottom 80 percent of households received only 17 percent of the tax cuts (an average of 1.4 percent of their after-tax incomes in 2025).[4]

The plan’s pass-through provision was a key factor in producing these skewed results.  Indeed, the pass-through provision is so expensive, titled to the top, and prone to abuse that President Trump’s new tax plan will have a hard time meeting his Administration’s commitment to focus on workers rather than high earners if it includes this provision.

  • The pass-through rate cut would cost $1.5 trillion over ten years, according to TPC, accounting for about one-fourth of the Trump campaign tax plan’s total cost.
  • About half of all pass-through income flows to the top 1 percent of households (those with incomes above $693,500 in 2016); only about 27 percent goes to the bottom 90 percent of households.  The tax-cut benefits would be even more skewed than these figures suggest:  higher-income households would get a larger tax break on each dollar of their pass-through income than other households because they are in higher income tax brackets.
  • The provision would create major new opportunities for tax avoidance.  An estimated 40 percent ($650 billion) of the $1.5 trillion cost would come from high earners reclassifying their non-business wage and salary income as pass-through income to take advantage of the lower rate, according to TPC.  In fact, the revenue losses due to tax avoidance would easily exceed the provision’s total tax cuts for the bottom 99 percent of the population.

Mr. Trump said that “small businesses will benefit the most from this plan.”[5]   But the 40 percent of its cost that comes from wealthy individuals reclassifying their non-business income would do nothing for actual small businesses.  And most small business owners would receive little from the remaining 60 percent of the tax cuts that the provision would deliver; that’s because more than two-thirds of pass-through businesses would receive no benefit from the proposal because they already pay income tax at a 15 percent or lower rate, the TPC data show.  (An overwhelming share of the benefits would go to filers in the top marginal income tax bracket — a group with net income exceeding about $470,000 for couples and comprised mainly of highly compensated hedge fund managers, doctors, lawyers, consultants, and investment managers, not mom-and-pop business owners.)[6]

The concept underlying the Trump proposal has already been tested on a smaller scale.  As part of an aggressive set of tax cuts, Kansas in 2012 exempted pass-through income from all state income taxes.  Since then, the state’s economy has performed poorly and its finances have been thrown sharply out of balance, in large part due to the revenue loss from the pass-through exemption.  Last week, the Kansas House and Senate passed — on a bipartisan basis — a tax package that would have closed the loophole, though Governor Brownback vetoed the bill.  As Republican State Senator John Doll said in support of the bill, “The right thing is to get out of this mess.”[7]  Federal policymakers should learn from Kansas’s example and avoid the mess in the first place. (See Box 2.)

Box 1: Why Some Have Called the Proposed Cut in the Pass-Through Rate the “Trump Loophole”

During the presidential campaign, Trump said that “[his tax plan] reduces or eliminates most … deductions and loopholes available to special interests, and to the very rich.  In other words, it’s going to cost me a fortune, which is actually true.”a  But the Trump pass-through proposal would enlarge a tax break and tax avoidance opportunity that wealthy investors like him are best placed to take advantage of. 

President Trump holds many of his businesses in pass-throughs.  His attorneys wrote last year:b

[Y]ou hold interests as the sole or principal owner in approximately 500 separate entities. These entities are collectively referred to and do business as The Trump Organization. . . .  Because you operate these businesses almost exclusively through sole proprietorships and/or closely held partnerships, your personal federal income tax returns are inordinately large and complex for an individual.

President Trump has not released his tax returns, so it’s impossible know how much he would benefit from the proposal to sharply reduce the tax rate on pass-through income.

A number of tax experts — including former IRS Commissioner Fred Goldberg and former Treasury tax official Michael Graetz (both of whom served in the George H.W. Bush Administration), former TPC Director Len Burman, and former Joint Committee on Taxation counsel Steven Rosenthal — have observed that Mr. Trump may already have made use of tax-avoidance techniques involving pass-throughs that would become still more lucrative and widespread under the pass-through proposal.c 

a Donald Trump, “Presidential Candidate Donald Trump News Conference on Tax Policy,” C-SPAN, September 28, 2015,

b Sheri A. Dillon and William F. Nelson, “Re: Status of U.S. federal income tax returns,” Morgan, Lewis & Bockius LLP, March 7, 2016,

c Len Burman, “Trump Is Proposing A Huge Tax Loophole, And He's Already Shown How Wealthy Americans Would Exploit It,”, November 5, 2016, ; Steven Rosenthal, TaxVox blog,, “Did Donald Trump take advantage of the Gingrich-Edwards payroll tax loophole?” October 7, 2016,; Fred T. Goldberg and Michael J. Graetz, “Trump Probably Avoided his Medicare Taxes, Too,” New York Times, November 2, 2016,

Pass-Through Rate Cut Is Costly and Prone to Abuse

Pass-through income is business income claimed on individual tax returns.  Instead of facing the corporate income tax, it “passes through” the business to the business owners and is taxed at their individual tax rates — the same rates that apply to their wage and salary income.  The types of businesses that can choose to be taxed as pass-through entities include partnerships (such as law firms or financial services firms), sole proprietorships, limited liability companies (LLCs), and S corporations (which are similar to companies that face the corporate tax rate but have 100 or fewer shareholders and elect to be taxed as a pass-through).

President Trump’s campaign tax plan proposed a 15 percent top rate for pass-through income — far below the top rate of 33 percent he proposed for wages and salaries, and even further below the current 39.6 percent top rate that applies to both wage and salary and pass-through income.[8]  (See Figure 1).  (The House Republican “Better Way” plan proposed a 25 percent top rate on pass-through income; the effects would be similar to, though smaller than, the effects of the Trump proposal that are analyzed here.[9])

Figure 1
Pass-Through Rate Cut: A Back-Door Way to Cut Top Tax Rate

The Trump proposal would cost $1.5 trillion over 2016 to 2026, TPC estimates — a quarter of the net revenue loss from the Trump campaign tax plan as a whole.[10]  There are two reasons why the tax cut would be so expensive:

  • It would deliver a large tax break to high-income filers by sharply cutting the rate on income they already report as pass-through business income. TPC estimates that $895 billion of the cost of the proposal would come from cutting taxes on income that would mostly have been reported as pass-through income anyway.  This high cost reflects the fact that most of that income would otherwise have fallen in the top tax rate brackets, and the proposal cuts taxes on that income by more than half.
  • It would spur large-scale tax avoidance by high earners.  The Trump plan sets the pass-through rate 18 percentage points below his proposed 33 percent top rate on salary and wages.  This big rate difference would create a huge new incentive for high-earning employees — such as highly compensated business executives, consultants, and other professionals — to become “businesses” for tax purposes to cut the tax rate on the income from their labor.  For example, a law firm partner who reclassified her $1 million salary as business income from the law firm would save $180,000 in taxes by doing so.
Figure 2
42 Percent of Cost of Trump's Pass-Through Proposal Due to Tax Avoidance

The Trump campaign proposal included no rules or enforcement mechanisms to prevent such gaming.[11]  TPC estimates that $649 billion of the proposal’s cost would come from high earners avoiding taxes by claiming that more of their income is from pass-through businesses.[12]

Indeed, much smaller tax differentials under current law already lead to significant income reclassification.  For example, many S corporation shareholders receive both wages from the company and a share of the company’s profits, but they pay payroll tax only on their wages. This gives them an incentive to underreport the share of their income that comes from wages and overstate the share that is pass-through business income in order to avoid the Medicare payroll tax that would otherwise apply.[13]  This tax avoidance strategy received attention when former lawmakers John Edwards and Newt Gingrich were found to be using it to shrink their payroll tax liabilities.[14]

More than two-fifths of the cost of the proposal would come from tax avoidance.The Trump pass-through proposal would expand this type of tax avoidance.  As TPC notes, “Current-law rules are difficult to enforce, leading to significant avoidance of payroll taxes; with the much larger rate differential under the revised Trump plan, avoidance would be much more prevalent.” [15]

Overall, more than two-fifths of the cost of the proposal would come from tax avoidance, TPC estimates. (See Figure 2.)

Box 2: Kansas Has Seen Effects of Ill-Advised Tax Cuts for Pass-Throughs

As part of an aggressive set of tax cuts, in 2012 Kansas exempted pass-through income from all state income taxes.  Analysts across the political spectrum (including CBPP)a flagged the risk; the Tax Foundation’s Joseph Henchman, for example, warned that excluding pass-through income from taxation would act as “an incentive to game the tax system without doing anything productive for the economy.”b

Since enacting the tax cuts, Kansas’ private-sector job growth, GDP growth, and growth in small business formation have all lagged well behind the country as a whole, and the pass-through exemption has failed to spur the growth of the kinds of pass-through businesses most likely to create jobs (other than for the firms’ owners) — S corporations, LLCs, and partnerships.  The state’s own data show that the annual rate of growth in these types of businesses actually slowed in the first two years in which the exemption was in effect.c

Further, the tax cuts have wreaked havoc on the state’s budget, with the pass-through exemption alone costing $472 million in 2014.  To balance its budget, Kansas has turned to budget gimmicks such as delaying a payment to schools into the next fiscal year, delayed road projects, cut services, and nearly drained the funds it had set aside to prepare for the next recession.  Two bond rating agencies have downgraded the state due to its budget problems.

In February 2017, the Kansas House and Senate passed on a bipartisan basis a tax package to close what has become known in Kansas as the “LLC loophole.”  Governor Brownback vetoed the bill, however, and the veto narrowly missed being overridden.d  Kansas appears to be stuck, for now, with the loophole, but there is no need for federal policymakers to repeat the Kansas mistake. 

a Nicholas Johnson and Michael Mazerov, “Proposed Kansas Tax Break for ‘Pass-Through’ Profits is Poorly Targeted and Will Not Create Jobs,” Center on Budget and Policy Priorities, revised March 26, 2012,

b Joseph Henchman, “Kansas May Drop Pass-Through Exclusion After Revenue Projections Miss Mark Again,” Tax Foundation, April 30, 2015,

c Kansas Department of Revenue, “Governor’s Consensus Revenue Estimating Working Group Final Recommendations,” October 4, 2016, Table 3, p. 9,

d In response to Governor Brownback’s veto, the state House voted 85-40 to overturn the veto, but the state Senate fell three votes short of overturn with a 24-16 vote. See Hunter Woodall and Bryan Lowry, “Gov. Sam Brownback’s tax policies survive — barely — after Kansas Senate vote,” Kansas City Star, February 22, 2017,

Loophole Would Be Lucrative for Those at the Top

The proposal to set a special low rate for pass-through income would provide massive benefits for the highest-income households.  They receive most of the pass-through income, would get the largest rate cuts on that income, and would enjoy most of the tax avoidance savings that the proposal would allow.

Pass-through income concentrated among the wealthiest.  In 2016, 51 percent of net pass-through income flowed to the top 1 percent of households, TPC estimates.[16] (See Figure 3.) Only about 27 percent flowed to the bottom 90 percent of households.

Figure 3
Pass-Through Income Highly Concentrated at the Top

Wealthiest would receive largest tax break on pass-through income.  In reality, the benefits of the tax cut would likely be even more skewed than pass-through income.  This means the top 1 percent would get at least half of the tax cuts from the pass-through rate proposal.[17]  A key reason is that, for the highest-income filers, pass-through income would be taxed at a rate that’s 24.6 percentage points below their current rate (15 percent versus 39.6 percent) and 18 percentage points below the proposed top rate under the Trump plan for wages and salaries (15 percent versus 33 percent).  Filers in lower brackets would receive less of a rate cut, and filers in the 15 percent bracket or below would get nothing from the special rate.[18]  For example, a couple with income of $1 million would receive a $2,460 tax cut (relative to current law) on each $10,000 of pass-through income that would otherwise be in the top tax bracket, compared to $0 for a couple with income below $75,000 and $1,000 at most for a couple with income of $150,000.[19]

Tax avoidance benefits would also flow to highest-income households.  TPC assumes that all the tax avoidance would be undertaken by people with wages of over $100,000 per person or $200,000 per couple.  High earners facing the 33 percent top marginal tax rate under the Trump plan would have the biggest incentive to reclassify their salaries as pass-through income that would instead be subject to a 15 percent rate.  They would reap the greatest tax savings because they would be subject to the largest rate cut and have larger amounts of earnings to reclassify.  The highest earners would also be most able to afford tax lawyers and accountants to help them reclassify their income, along with greater flexibility to negotiate with their employers to instead be paid as a pass-through business “contractor.”  The revenue losses from tax avoidance would easily exceed the total tax cuts on actual business income for the bottom 99 percent of the population.

Small Business and Parity Arguments Don’t Withstand Scrutiny

President Trump has presented his pass-through proposal as helping small businesses, while others have argued that the rate cut is needed to provide parity between pass-throughs and corporations.  In reality, most small businesses wouldn’t benefit at all from the rate cut, and many large businesses elect to be taxed as pass-throughs because of the tax advantages that gives them, relative to being taxed as corporations, under current law.

Most Small Businesses Wouldn’t Benefit at All

Cutting the marginal tax rate for pass-through income would not benefit the vast majority of small business owners.  Most small businesses are in fact “small.”  And most small-business owners have moderate incomes and hence would not benefit from proposals to cut the tax rates that only high-income filers face.


Figure 4
Most Pass-Through Filers Are Already Taxed At Lowest Individual Tax Rates


The pass-through income of most low- and middle-income income filers already is taxed at lower rates than they would pay under the Trump proposal.  TPC estimates that almost 70 percent of filers with pass-through income are currently taxed at a statutory marginal income tax rate of 0, 10, or 15 percent. (See Figure 4).  Even under the proposal to set the top rate on pass-through income at 15 percent, most taxpayers with pass-through income would not benefit. [20]

 Much of the pass-through income of wealthy filers has nothing to do with “small businesses.”[21]  As TPC notes, the bulk of pass-through income taxed at high rates goes to doctors, lawyers, consultants, and other professionals and, for the very highest earners, to partners in hedge funds or other investment firms.[22]  Income that could qualify for the loophole includes:

  • The $37 million in average net income from S corporations and partnerships that the 400 highest-income filers reported in 2014.[23]  Conservatively, the lower pass-through rate under the Trump plan would give the 400 highest-income households a tax break of about $9 million each compared to their current tax rates, or about $7 million each compared to the 33 percent top rate on ordinary income they would otherwise face under the Trump tax plan.[24]
  • Income for finance, holding company, and professional services firms that flows through the firm to its partners, which makes up 76 percent of the partnership income reported by the highest-income 1 percent of filers.[25]
  • Income reaped by owners of extremely large pass-throughs.  In 2012, only 0.4 percent of S corporations had receipts over $50 million, but they earned 40 percent of all S corporation income.  Similarly, just 0.3 percent of partnerships had receipts over $50 million, but they earned more than 70 percent of partnership income.[26]  Much of the income of these very large businesses could qualify for the pass-through rate cut.

Parity Argument Also Misleading

Proponents of cutting pass-through rates also argue that doing so is necessary to achieve “parity” between pass-throughs and C corporations, especially in the context of tax reform that reduces the corporate rate.  This argument glosses over the fact that, on average, pass-through entities already face lower marginal tax rates on new investment than C corporations do, as Treasury analysis has found.[27]  Moreover, many businesses choose to be taxed as pass-through entities instead of as corporations because it lowers their taxes.  The relative tax benefits of choosing to be taxed as a pass-through rather than as a corporation depend on several factors, but high-income investors can often reduce their taxes by operating their businesses as pass-throughs (and can retain various legal protections afforded to corporate investors even while doing so).[28] 

Pass-throughs and C corporations are taxed differently.  Where pass-throughs pay only individual tax, C corporations may face corporate income taxes and then dividend and capital gains taxes at the shareholder level.  Arguments to equalize the top tax rate between pass-throughs and C corporations ignore that C corporations may pay additional taxes at the shareholder level.  Setting the top rate on pass-through income equal to the top corporate tax rate thus means that pass-through income will, on average, be taxed at significantly lower rates.

End Notes

[1]  Margaret Talev, “White House: Cohn-Led Tax Plan Is Real and It’s Phenomenal,” Bloomberg, February 10, 2017,

[2] Chuck Marr, “Treasury Nominee’s Claims at Odds With Trump Tax Plan,” CBPP, November 30, 2016,

[3] Corporations in this context refers to companies organized as C corporations, which are taxed at the entity level, not S corporations, which are taxed at the individual level.

[4] TPC Tables T16-0213 and T16-0214.

[5] Donald Trump, “Read Donald Trump’s Economic Speech in Detroit,” TIME, August 8, 2016,

[6] Frank Sammartino, “Taxation of Pass-Through Businesses,” Tax Policy Center, January 29, 2017,

[7] John Hanna, “Kansas lawmakers vote to roll back governor’s deep tax cut,” AP News, February 17, 2017,

[8] James R. Nunns et al., “An Analysis of Donald Trump’s Revised Tax Plan,” Tax Policy Center, October 18, 2016,

[9] The House GOP pass-through proposal would cost $413 billion — more than 13 percent of the net $3.1 trillion cost of House GOP plan — before taking into account tax avoidance.  James R. Nunns, et al., “An Analysis of the House GOP Tax Plan,” Tax Policy Center, September 16, 2016,

[10] Nunns et al., “An Analysis of Donald Trump’s Revised Tax Plan.”  The entire plan costs $6.2 trillion over 2016 to 2026, TPC estimates.


[12] Nunns, et al., “An Analysis of the House GOP Tax Plan.”  TPC’s analysis details the assumptions it used to assess the proposal.  TPC assumed that half of high earners would eventually became pass-throughs at the rate of 5 percent per year. 

[13] Individuals who are both employees and shareholders of an S corporation are supposed to report “reasonable” compensation to themselves, but many do not, as various investigations have documented.  See Chuck Marr, Chye-Ching Huang, and Joel Friedman, “Tax Expenditure Reform: An Essential Ingredient of Needed Deficit Reduction,” CBPP, February 28, 2013,


[15] Nunns et al., “An Analysis of Donald Trump’s Revised Tax Plan,” p.5.

[16] TPC Table T16-0184.  Includes tax units with positive net business income as well as those with only net losses.  If counting only returns with positive net business income, 47 percent of pass-through income goes to the top 1 percent of households.

[17] There is some offsetting effect from the fact that the reduction in the tax rate might lead high-income households to realize more income (particularly capital gains income from pass-through businesses), somewhat reducing the share of the revenue loss they account for.  Nonetheless, high-income households will receive a larger share of tax benefits than their share of pass-through income.

[18] Pass-through income is also a greater share of total income for the highest-income filers than for less-affluent people, so they would get a rate cut on a greater portion of their income.  Pass-through income accounts for more than 29 percent of the adjusted gross incomes (AGI) of filers in the current top bracket.  By contrast, for all households, pass-through income accounts for an average of just 8.8 percent of AGI.  The proposal thus would raise after-tax income far more for the highest-income filers than for middle-income filers, and would thereby increase income inequality.  Tax Policy Center table T16-0182.

[19] Relative to the tax brackets in the Trump plan, the couple with income of $1 million would get a $1,800 tax cut, compared to $0 for a couple with income below $75,000 and $1,000 at most for a couple with income of $150,000.

[20] A Treasury analysis of small business owners — more narrowly defined — in 2010 shows 67 percent already face rates of 15 percent or lower.  These estimates define a small business owner as someone deriving at least 25 percent of his or her adjusted gross income from a small business.  They define a small business as one with at least $5,000 in deductions for activities considered “businesslike” (such as expenses related to employees, inventories, office supplies, and rent) and income and deductions of less than $10 million.  Matthew Knittel et al., “Methodology to Identify Small Businesses and Their Owners,” Office of Tax Analysis Department of the Treasury, Technical Paper 4, August 2011, Table 17,

[21] The House GOP proposal applies only to “active” income of pass-throughs (requiring owners and investors to meet rules about how involved they are in managing the business), so it would be somewhat more restrictive than the Trump proposal.  However, to the extent that any of the income sources listed in the text are “active” income under current definitions, they would qualify for the House GOP pass-through tax break as well.

[22] Sammartino.

[23] These are average figures for all of the 400 highest-income taxpayers, not just those reporting S corporation and partnership income.  The figures adjust for net losses from S corporations and partnerships.  Internal Revenue Service, “The 400 Individual Income Tax Returns Reporting the Largest Adjusted Gross Incomes Each Year, 1992–2014,” December 2016,  More than half of the 400 highest-income Americans report positive S corporation or partnership income — 248 such filers in 2014, while 143 of the top 400 reported net losses from S corporations and partnerships.

[24] This estimate is conservative because it does not account for any income shifting due to tax avoidance or for capital gains income from pass-through entities.

[25] Michael Cooper et al., “Business in the United States: Who Owns it and How Much Tax Do They Pay?” National Bureau of Economic Research, October 2015,

[26] Joint Committee on Taxation tabulations using IRS Statistics of Income data.  See Tables 4 and 5 in Joint Committee on Taxation, “Background on Business Tax Reform,” April 22, 2016,

[27] White House and Department of the Treasury, “The President’s Framework for Business Tax Reform: An Update,” April 2016,

[28] For example, corporate limited liability means that beyond risking their investment, the owners cannot be held liable for the debts or other legal obligations of the business.