Don’t be fooled: Senate’s tax cuts would mostly benefit the wealthy
Republicans on the Senate Budget Committee violated their supposedly sacrosanct principles of fiscal hawkishness last week, by saying that it would be just fine with them to add $1.5 trillion to the deficit over 10 years in order to cut taxes. They justify this hypocrisy by asserting what has been disproved time and again — that tax cuts spur the economy and compensate for any lost revenue.
In fact, these cuts could hurt the very people they purport to help — small-business owners, middle-class professionals and working-class Americans.
While even initial details of the tax plan were not expected before this week, deep corporate tax cuts have been a Republican priority for some time. Much of the discussion of that has revolved around the top rate, now 35 percent. President Donald Trump has called for lowering it to 15 percent, while his economic aides and House Republicans favor a top rate around 25 percent.
But the rate cut on corporate profits is only part of the plan. A centerpiece of proposals made in the past by Trump and the House speaker, Paul Ryan, has been to tax so-called pass-through income at the same rate as corporate profits.
Currently, such income passes through businesses — including partnerships, limited liability companies and sole proprietorships — onto the owners’ personal income tax returns, where it is taxed at rates of up to 39.6 percent. Instead, the Republicans would tax it at the new corporate rate of 15 or 25 percent.
Republican advocates of this proposed sleight-of-hand like to sell it as a benefit for small businesses, freelancers and moonlighters — the middle class. But passthrough income from nearly 70 percent of small businesses already is taxed at top rates of 15 percent or less, because those businesses are, in fact, small, and their owners’ income is modest.
If pass-through income were taxed at the same proposed rate as corporate income, the real beneficiaries would be hedge fund managers, law firms and real estate developers like Trump. Households making more than $1 million would receive more than two-thirds of the benefits if the rate was cut to 15 percent, according to the nonpartisan Tax Policy Center.
The average tax cut for millionaires would be $114,000 in 2018, raising their after-tax incomes by more than 5 percent. For multimillionaires, the tax savings would pile up even more. The 400 highest-income taxpayers in the country, with average annual incomes exceeding $300 million each, derive about one-fifth of their income from pass-through businesses.
The Budget Committee agreement is a crucial first step in the tax-cut quest, because Senate Republicans must approve a budget before invoking rules that let them pass a tax-cut bill with only a simple majority, effectively eliminating the need for any Democratic support.
The strategy now is for the committee’s Republicans to pass the budget, after the expected vote this week on yet another attempt to repeal the Affordable Care Act. After the Senate passes that budget, it would likely become the template for compromise budget legislation with the House. Selfstyled deficit hawks in the House are expected to raise a fuss about tax cuts that are not offset by spending cuts, but when faced with a choice between controlling deficits and cutting taxes, it’s a safe bet a majority of Republicans will choose tax cuts.
Republicans claim to seek broad support, and a White House official said Tuesday that the rich would not see a benefit from the tax plan. But the proposals they have floated would not benefit their middle-class constituencies in any lasting way and could actually harm them. If a passthrough plan is enacted, it will deprive the Treasury of revenue that might otherwise be used to invest in infrastructure, health care, science and education — in other words, the real priorities of most Americans.