Currently, such income passes through businesses — including partnerships, limited liability companies and sole proprietorships — onto the owners’ personal income tax returns, where it is taxed at rates of up to 39.6 percent. Instead, the Republicans would tax it at the new corporate rate of 15 or 25 percent.
Republican advocates of this proposed sleight-of-hand like to sell it as a benefit for small businesses, freelancers and moonlighters — the middle class. But pass-through income from nearly 70 percent of small businesses already is taxed at top rates of 15 percent or less, because those businesses are, in fact, small, and their owners’ income is modest.
If pass-through income were taxed at the same proposed rate as corporate income, the real beneficiaries would be hedge fund managers, law firms and real estate developers like President Trump. Households making more than $1 million would receive more than two-thirds of the benefits if the rate was cut to 15 percent, according to the nonpartisan Tax Policy Center.
The average tax cut for millionaires would be $114,000 in 2018, raising their after-tax incomes by more than 5 percent. For multimillionaires, the tax savings would pile up even more. The 400 highest-income taxpayers in the country, with average annual incomes exceeding $300 million each, derive about one-fifth of their income from pass-through businesses.
The Budget Committee agreement is a crucial first step in the tax-cut quest, because Senate Republicans must approve a budget before invoking rules that let them pass a tax-cut bill with only a simple majority, effectively eliminating the need for any Democratic support.
The strategy now is for the committee’s Republicans to pass the budget, after the expected vote next week on yet another attempt to repeal of the Affordable Care Act. After the Senate passes that budget, it would likely become the template for compromise budget legislation with the House. Self-styled deficit hawks in the House are expected to raise a fuss about tax cuts that are not offset by spending cuts, but when faced with a choice between controlling deficits and cutting taxes, it’s a safe bet a majority of Republicans will choose tax cuts.
Republicans claim to seek broad…