This is a frequent mistake in reporting on the tax proposal, as in this Post article telling us:

"Under the Trump plan, pass-through businesses get a substantial reduction in taxes."

This is wrong since pass-through corporations already don't pay any taxes, so their taxes can't be reduced unless we have a negative income tax for them. The tax cut applies to income from pass-through corporations.

This distinction matters for two reasons. First, it means that taxpayers with the same income will pay different tax rates depending on its source. Under the plan passed by the Senate, anyone can get a 23 percent reduction in their tax bill if they arrange for their income to come through a pass-through corporation.

While this tax break is not likely to do much to promote economic growth, it will be rocket fuel for the tax shelter industry. There will be a flood of pass-through corporations created as higher-earning workers, like doctors and lawyers, arrange to have their income paid to them from their pass-through corporations rather than as normal wage income. (Yes, this is supposed to be illegal, but the Republicans have spent two decades gutting the IRS's enforcement capabilities. If you think the IRS, given its current resources, will be able to prevent widespread evasion, please contact me so I can sell you some digital currency.)


The other reason this difference matters is that it calls attention to the absurd concept of a "pass-through corporation." Corporate status is a special privilege that allows business owners to escape personal responsibility for the debts and liabilities of their businesses. This means both that if the business takes on debt it can't repay, the owners are not liable, and also if it inadvertently harms people, the owners cannot be held responsible. For example, if a fireworks factory blows up and burns down the surrounding houses, the homeowners cannot collect damages from the factory owner, if it is a corporation.

This is the logic of the corporate income tax. If you want the benefits of corporate status, then you pay for it through the corporate income tax. A pass-through corporation subverts this logic by allowing business owners to get the benefits of corporate status without paying the corporate income tax. Pass-through corporations were first allowed in 1958, prior to that date if business owners didn't want to pay the corporate income tax they had to organize their business as partnerships or proprietorships, under which they were personally liable for the debt and damage caused by the business.

The creation of pass-through corporations and now the special lower tax rate being proposed on income received from these corporations is part of the effort to redistribute income upward that our politicians have been pursuing in the last four decades. Since the rich have trouble getting by in a free market, the government has been actively working to structure the market to give them more money. This is yet another chapter in that story. (Yes, I am hyping my [free] book, Rigged: How Globalization and the Rules of the Modern Economy Have Been Structured to Make the Rich Richer.)