The tax bill has now passed both the US House and Senate. The next step would be for President Trump to sign the bill into law, making it the most significant tax overhaul in over 30 years.
It has been touted as a significant step toward assisting average Americans and small businesses. However, analyses have shown that the reforms will actually be most beneficial to the most wealthiest Americans, and as we explained in a post last month, the benefits to small businesses will be minimal.
This New York Times article does a good job of showing just how the “small business tax cut” really works. The bill provides a 20 percent deduction for “pass-through” income, which means that businesses organized as partnerships or “S” corporations that report their business income on their personal taxes (rather than business taxes) will get a break. As our previous post explained, and as the NY Times article shows, when it comes to pass-through income, most of the people who would benefit are not even businesses.
Of the 40 million taxpayers reporting pass-through income, over half are non-business entities. See the graphic below from the NY Times. Only a small fraction– 4 million– of those reporting pass-through income are small businesses who are employers, the businesses that the bill purports to help. Furthermore, as reported by the NY Times:
- 69 percent of pass-through income is held by the top 1 percent of households.
- Less than half of those who claim pass-through income conduct “traditional” business activity.
The bill provides an incentive for people to claim their income as pass-through because the rates for pass-through income will be lower than the rates for individual income taxes.
There are limits on how much high income earners can claim. For the professional service industry, the deduction phases out for singles earning $157,500 or more, and couples earning $315,00 or more. For other industries, the cap on the deduction would be calculated using a formula that takes into account wages paid and cost of tangible deductible property. Large businesses that pay a high amount in wages or that require a lot of capital will therefore get a larger break.
While there will be traditional, “Main Street” small businesses who will benefit from this bill, they are far from the primary beneficiaries. Small businesses are often talked about in debates to make a program or policy sound as though it is aimed at bolstering “regular” Americans. But as they say, the devil is in the details. What small businesses really need are investments to help them start up and grow, resources for training, access to coaching and mentoring, and a level playing field for them to succeed.