Trump’s tax plan champions ‘pass-through’ businesses that helped fuel the rise of the 1%

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President Donald Trump rose to power by painting himself as a political outsider who, despite his own wealth, would stand with working Americans against Wall Street and other big-money interests.

Instead, not only has Trump packed his Cabinet with bankers and rich corporate chieftains, but he is also pitching a tax cut plan that the administration is billing as helping the middle class but that most independent experts say is heavily tilted toward the wealthy.

Look no further than Trump’s proposal on so-called “pass-through” businesses. If you’ve never heard of a pass-through business or are unfamiliar with its definition, you are not alone: they disproportionately benefit the wealthy, because they are a way of reclassifying the income of business owners so that they are not taxed at higher, individual rates.

They are also big contributors to ever-worsening US income inequality, according to a 2015 analysis from a group US Treasury Department tax economists and outside academics, published by the National Bureau for Economic Research.

“Pass-through businesses like partnerships and S-corporations now generate over half of U.S. business income and account for much of the post-1980 rise in the top- 1% income share,” wrote Michael Cooperand co-authors in the paper.

What is a pass-through?

There’s a reason the term pass-through itself sounds opaque and difficult to understand. Like much of financial lingo, that’s by design, giving a sustained advantage to Wall Street types who “speak finance.”

Yet it turns out that 95% of US businesses are not C-corporations but rather pass-throughs, which have their income “‘pass-through’ to their owners to be taxed under the individual income tax,” according to a recent report from the Brookings Institution.

And, according to Cooper and his colleagues, “relative to traditional business income, pass-through business income is substantially more concentrated among high-earners.”

Speaking of opaque and weighted toward the wealthy — so are pass-throughs themselves.

“Partnership ownership is opaque: 20% of the income goes to unclassifiable partners, and 15% of the income is earned in circularly owned partnerships,” Cooper and his co-authors write.

Even before any new cuts, “the average federal income tax rate on U.S. pass- through business income is 19% much lower than the average rate on traditional corporations.”

If pass-through activity had remained at the low level seen in the 1980s, the research estimates the 2011 average US tax rate on total US business income would have been 28% rather than 24% — and tax revenue would have been as much as $100 billion higher.

No wonder Reuters reported on hedge fund managers’ fist-bumping reaction to the president’s tax outline.

Trump’s proposals, which would allow rich business owners and investors to pay a 25% pass-through rate rather than pay individual income tax, are a far cry from the message of candidate Trump, who often accused his opponent Hillary Clinton of being beholden to financial interests.

“The hedge fund guys didn’t build this country,” he argued as a candidate. “These are guys that shift paper around and they get lucky.”

In a campaign ad, Trump went directly after Goldman Sachs CEO Lloyd Blankfein, calling him the embodiment of the global elites that “have robbed our working class.”

Now that Trump is surrounded by former Goldman bankers himself, the message sounds a lot different.

And here’s a small coincidence, the cherry on top: While Trump is the only president in history to never have released his tax returns, multiple outlets have reported that a large portion of his own earnings appear to be the result of pass-through income.

Brookings Institution