A major provision of President's Trump tax plan could cut almost almost $2 trillion in taxes over ten years, with the benefits going almost entirely to America's richest households, according to new estimates from the Tax Policy Center.
While the Trump administration's one-page tax plan was thin on details, it proposed a major change that has long been sought after by business groups: taxing so-called pass-through income — where profits from a business are passed directly to the personal income tax statements of its owners — at a lower rate than the regular income tax.
The majority of all US business profits are currently reported on the income tax statements of their owners. These businesses range from mom and pop stores to companies set up by doctors, lawyers and other professionals, all the way up to major hedge funds and financial businesses.
Those profits are currently subject to income tax rates that can be as high as almost 40%. Lowering that tax rate down to 15% — a corporate tax rate proposed by the Trump administration — would knock down tax revenue by $1.36 trillion over ten years, the Tax Policy Center estimated.
It would also encourage people to classify their wages as business income, the Center said, estimating another $600 billion of government revenue would be lost that way.
"More than three-quarters of the net benefit would go to those in the top one percent of the income distribution," said the Tax Policy Center, a joint project of the left-of-center Brookings Institution and the liberal Urban Institute. The wealthiest 1% of households would see their tax bills decrease by an average of $76,000 per year, while the richest 0.1% would get a $638,000 cut. A small percentage of middle-income households would benefit, by an average of $370 a year, according to the estimates.
Overall, less than 7% of all households would benefit from the tax cut, the Center estimated.
About 80% of all businesses in 2012 passed their untaxed profits directly to their owners. Just over 50% of all flow-through income goes to households making $693,000 or more — the top 1% of household income, TPC data shows, and around two thirds goes to households in the top 5% of the income distribution.
The Trump tax plan includes some provisions that could raise the taxes paid by wealthy households, like scrapping all deductions besides the mortgage interest and charitable giving deductions, but is overwhelmingly likely to increase their after tax income thanks to the big rate cuts. It also would eliminate the alternative minimum tax and the estate tax, both of which are mostly paid by wealthy households.