- Getty/Joe Raedle
The tax framework document released by Republican leaders on Wednesday says “small businesses drive our economy and our communities, and they deserve a significant tax cut.”
The public seems to agree: A September poll from The Wall Street Journal found 57% of Americans favor a tax cut for small businesses – which, somewhat surprisingly, is higher than the 40% of respondents who said their own families ought to get a tax cut.
But the “small business” tax cut in the Republican proposal is not really aimed at small businesses. Much of its benefit would flow to large businesspeople – like Donald Trump.
How it works
The Republican proposal “limits the maximum tax rate applied to the business income of small and family-owned businesses conducted as sole proprietorships, partnerships, and S-corporations to 25%.”
A business does not have to be small to be family-owned, and it does not have to be small to be organized in one of these forms. To choose one example at random, financial disclosures from family businessman Donald Trump show that he owns hundreds of businesses that are structured as partnerships or sole proprietorships, some of them presumably quite large.
Trump would nonetheless be able to take advantage of this “small business” provision, paying tax on his income from these entities at a rate of 25% when other high-income taxpayers would pay at rates up to 35%.
Other rich taxpayers would benefit, too. Law firms are typically structured as general partnerships, even very large and prestigious ones. Under Trump’s plan, the partners who own the firms would enjoy a lower tax rate than the associates they employ.
Really small businesses get no benefit
On the other hand, a lot of truly small businesses would get no benefit from this provision, because a cap of 25% on your tax rate only matters if you would have otherwise been taxed at more than 25%.
Under current law, business income of the type discussed here is taxed in the same manner as wage income, at graduated rates that rise with your income.
Republicans have proposed three tax brackets for regular income: 12%, 25% and 35%. They haven’t specified where those brackets would apply, but Trump’s last campaign tax plan applied the 25% bracket up to $112,500 of taxable income ($225,000 for married couples).
So, assuming Republicans use those same bracket thresholds, and accounting for their proposal for a $12,000 standard deduction, this “small business” tax preference won’t help you at all unless you’re in the top income tax bracket. That means your income would have to be at least $124,500 – or $249,000, if you are married.
Of course, a business with $250,000 in profits is still a small business. But when Americans tell pollsters they want a tax cut for “small business,” I doubt they mean they want to exclude business owners with family incomes under a quarter million dollars.
As is often the case with Republican tax plans, what is advertised as a tax break for “small business” is actually a proposal to create a tax preference for wealthy people like Donald Trump.
Kansas tried this approach at the urging of conservative ideologues, found it to be a failure, and repealed it. It should not be taken national.