Senior Director of Federal Tax Policy
Emerging details of the “Big Six” Republican tax framework contradict President Trump’s September 13 promise that wealthy people “will not be gaining at all with this plan” and his suggestion that if their tax rates “have to go higher, they’ll go higher.” In fact, the details suggest that the Republican tax effort remains aimed in substantial part at delivering large tax cuts to the nation’s most well-off people:
Special 25 percent rate for “pass-through” income. The Big Six have reportedly agreed to a proposal, which was also a centerpiece of both President Trump’s campaign tax plan and the House GOP’s “Better Way” tax plan, to create a special, much lower top rate for pass-through income. This is income from businesses such as partnerships, S corporations, and sole proprietorships that the business owners claim on their individual tax returns and that’s currently taxed at the same rates as wages and salaries (where the top rate is now 39.6 percent). Pass-through businesses, which include hedge funds, real estate developers, and law firms, are exempt from the corporate tax on profits and taxes on dividends, so they often face lower total taxes than corporations.
Setting a top pass-through rate of 25 percent — the same rate as in the “Better Way” plan — would be highly regressive:
Also of note, Kansas created a tax exemption for pass-through income as part of its massive 2012 tax cuts, but reversed that exemption — along with most of those tax cuts — earlier this year after they led to budget shortfalls and, in turn, a downgrade of the state’s credit rating.
Top individual income tax rate of 35 percent. The Big Six have reportedly agreed to cut the top individual rate to 35 percent, the same rate that President Trump has proposed. This change, too, would be very regressive:
Corporate tax rate of 20 percent. The Big Six have reportedly agreed to the House GOP’s proposal to cut the corporate rate nearly in half, from 35 percent to 20 percent. This is another regressive proposal:
As in previous iterations of Republican tax plans, the reported Big Six proposals are light on details about potential revenue-raisers or other provisions to lessen the revenue loss from these costly tax cuts.
The Big Six also are reportedly considering provisions purportedly aimed at working class people. But these possible changes — such as increasing the standard deduction — would likely do far less for low- and moderate-income families than an approach like Senator Sherrod Brown and Rep. Ro Khanna’s proposed expansion of the Earned Income Tax Credit. Instead of taking this opportunity to raise the living standards of truck drivers, warehouse workers, home health aides, cooks, and other lower-wage workers — as the Brown-Khanna approach would do — the Big Six appear more focused on doing more for those at the top of the income scale.