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Republican “Small Business” Tax Cuts Would Mostly Help Rich Individuals

Asked whether, under a tax reform plan that the incoming Republican majority plans to write, “the rich” will receive “the greatest part of the tax cuts,” House Speaker Paul Ryan suggested that the proposed tax cuts at the top are aimed mostly at small business.  “Most of that income is small business income,” he told CBS’ Scott Pelley in a “60 Minutes” interview.  But that’s wrong in two basic ways.

First, both President-elect Trump’s campaign tax plan and the House Republicans’ “Better Way” plan would cut tax rates for the highest-earning individuals on individual income that has nothing to do with even an expansive (and what would be misleading) definition of small business income — e.g., on salaries, capital gains, and so on.  This income accounts for fully three-quarters of all income of the top 1 percent, according to the Tax Policy Center.

Second, both plans include large cuts in the rate for “pass-through” income — business income that’s taxed at the owner’s individual rate rather than the corporate rate, which accounts for the remaining quarter of the top 1 percent’s income.  It’s misleading, however, to claim that this tax cut is for “small business.”  While some pass-through income is from small businesses, most of it reflects the earnings of wealthy individuals such as partners in a law firms or investors in real estate partnerships.

Pass-through income is concentrated at the top.  Some 69 percent of pass-through income in 2011 went to the top 1 percent of filers, economists from the Treasury Department, the University of Chicago, and the University of California at Berkeley concluded last year (see graph).

Moreover, while pass-through income is concentrated among the rich, most small business owners with pass-through income aren’t rich — and, for them, the House GOP tax plan is largely irrelevant.  It proposes a special 25 percent rate for all pass-through income, but 87 percent of small business owners with pass-through income already face a 25 percent rate or below.  The Trump plan, which would tax all pass-through income at an even lower 15 percent rate, is also irrelevant to most small business owners.

Meanwhile, the richest 1 percent of people get a quarter of their income from pass-through income, so they’d benefit handsomely from the special 25 percent rate, which is well below the 39.6 percent top marginal tax rate on individual income that they face today.  And they’d get an even bigger windfall under the Trump plan.