September 28, 2017
There has been much bizarre reporting on the Republican proposal for a big cut in taxes on income from pass-through businesses. The proposal would have a top tax rate on the income from pass-through businesses at 25 percent. This is routinely reported as a cut in taxes on businesses.
This makes zero sense as any fan of English and logic should be able to see right away. The tax cut is on income from “pass-through” businesses, as in businesses that don’t pay taxes. The tax break is for the individual that gets the money, not the business, which already pays zero tax.
Furthermore, since the overwhelming majority of the people who get income from pass-through businesses are not especially rich, they are already paying taxes at a 25 percent rate or less. The only people who would benefit from this lower tax rate are high-income people who are in a higher tax bracket.
It is bizarre that this is reported as a reduction in a tax on business. These businesses already pay zero tax. Their tax can’t be reduced further unless the government were to have a policy of subsidizing them.
This is a proposal to tax individual income received from owning a business at a lower rate than other income. This means that a lawyer who works for a law firm and receives a salary would be taxed at a higher rate than a lawyer who formed a pass-through corporation and received income from this corporation.
This difference in tax rates, based on the source of income, is pretty much a textbook example of bad tax policy. It gives a strong incentive for people to play games with the tax system. This is a pure waste of resources on unproductive activity. It will slow economic growth.
It also makes the system less progressive since the only people who will be able to take advantage of these tax tricks are relatively wealthy. In addition, the people who run the tax gaming will also make lots of money since they will get a cut of the tax savings. Tax gaming is a major source of inequality since the people who run the tax games get rich. (Think of private equity partners.)
Anyhow, there is no reason for the media to help this tax cut proposal gain public support by calling it a tax cut on business. It isn’t.
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