Trump’s Giant Tax Loophole

In Taxes On

One of the major goals of tax reform is to reduce the opportunities for savvy taxpayers to game the system. But if President Trump and House Republicans have their way, we will have a new contender for the tax code’s largest loophole: a new special cap on the tax rate for so-called pass-through business income.

Proponents say that such a cap will benefit small businesses, but in reality, it will overwhelmingly benefit the wealthy. Tax experts on the left and right, including those who generally support business tax cuts, agree that it is a terrible idea. But with support for it in the White House and on Capitol Hill, it might well become law.

Pass-throughs are businesses that do not pay taxes but instead report their taxable profits to their owners, who then pay tax on their share of the profits. (Limited-liability companies, or L.L.C.s, are a common example of a pass-through.)

This sounds technical, but the implications are huge, providing a big tax advantage over “C corporations,” like Ford or CVS, which pay corporate income taxes and whose shareholders pay a second layer of tax when the corporation pays dividends or its shareholders realize a gain.

Supporters claim that most pass-throughs are mom-and-pop operations, and it’s true that many are. But pass-throughs are also enormously popular among the wealthy, including people like the president himself, who owns some 500 pass-through businesses.

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