U S News and World Report: A Pass for the 1 Percent

Trump’s ‘pass-through’ tax break does nothing for small business and makes the rich richer.

President Donald Trump’s tax plan is a pinata full of tantalizing tax break goodies. But there’s not much reason to take a whack at it unless you are in the top 1 percent.

The plan includes corporate tax cuts and a reduction in the top individual rate; it gets rid of the alternative minimum tax; and it completely eliminates the estate tax, which currently affects only individuals who are worth more than $5.4 million, or married couples worth $11 million when they die. If the president were actually worth the $10 billion he has sometimes claimed (don’t laugh), eliminating the tax would save his heirs a tidy few billion dollars.

The proposed tax break that makes the very rich the happiest, though, may be the so-called “pass-through” income provision. It is being marketed by the Trumpsters as a tax cut for small businesses and entrepreneurs. In fact, what the pass-through plan creates is a giant loophole that gives the wealthy a new way to avoid paying their fair share.

If it becomes law, here’s how it will work. First, you’ll want the help of a high-priced accountant to work out the details and make sure that what is essentially a tax avoidance scam passes muster as legitimate with the IRS. If you are very highly paid by a corporation right now, the accountant will help you form a limited liability corporation with yourself as the sole employee. Then the limited liability corporation contracts with your previous employer for your “consulting” services.

You get paid the same amount, but instead of paying the top individual tax rate on your income, currently 39.6 percent, you pay only the “pass-through” rate of 25 percent. Because what used to be your salary now passes through a “business” you own and becomes “business income,” you save a bundle.

Trump wants us to believe that this tax break is necessary for “small businesses” to compete with large corporations. The cruel irony is that Trump’s tax plan is far more likely to help those very large corporations at the expense of true small businesses than it is to do the opposite. His proposal calls for cutting the corporate tax rate down to 20 percent, and several reports have indicated that he’d like it to go even lower. On top of that, Trump’s plan would make overseas profits entirely tax-free. That means that while 88 percent of small businesses get no benefit at all from Trump’s “small business” proposal, you can bet that almost all giant multi-national corporations will be padding their bottom lines even more.

Even worse, the nonpartisan Tax Policy Center found that rich people reclassifying their regular income into “business income” would add almost $130 billion to the overall cost of the new tax rate.

We got just a glimpse of one Trump tax return from 2005. Had the proposed pass-through law been in effect back then, he would have saved $16 million.

You may remember the huge tax cut bill passed by the Kansas legislature back in 2012, hailed at the time by then-Gov. Sam Brownback as a breakthrough that would supercharge the state’s economy. Among the provisions of that bill was one that made it much easier for individuals to reduce their taxes by forming limited liability corporations. It was supposed to help create new jobs and businesses. The opposite happened. Kansas fell behind most other states in job creation, and the deficits caused by the loss of tax income created a financial crisis from which Kansas is still digging itself out.

On the national level, the Tax Policy Center estimates that the pass-through provision will cost the federal government a whopping $770 billion over the next 10 years. That’s more than it will spend on highway construction and maintenance. It is more than 5 times the funding that local school districts will receive from the Washington for K-12 education. It’s about 12 times more than the National Institutes of Health will get for cancer research. Surely there are better ways for us as a nation to spend $770 billion than by giving it away in a new tax loophole that will mainly benefit the rich and their accountants.

Trump and his congressional supporters are trying their best to put lipstick on a pig by insisting their tax plan helps working families, but most Americans aren’t buying it. A majority of Americans oppose his tax cuts. Seventy-seven percent believe that the tax system already favors the wealthy. Just as they mobilized earlier this year to kill the health care repeal bill because they knew it was a bad deal, the American people are going to oppose the current tax cut bill. More than 230,000 of them have signed the “Not One Penny” pledge against tax cuts for the rich.

I agree with them that it is time for a bipartisan tax reform bill that would eliminate the giveaways to the wealthy and instead push for a tax policy that really helps small businesses and the middle class. That won’t happen in this Congress, but we should fight to prevent the worst provisions in the Trump bill from becoming law.