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Senate tax bill suffers blow as measure picks up support
The corporate tax rate is not the only important tax cut affecting businesses that's being considered in the Republican tax bills. The pass-through tax rate affects millions of small businesses, and has been a point of debate and dealing. Hari Sreenivasan talks to Jim Tankersley of The New York Times about that and who really gets the biggest cuts.
Much has been made about how the corporate tax rate is getting cut under the Republican tax bills being considered in Congress. But there's another important tax cut, one affecting small businesses, that's also been the source of debate and dealing.
Hari Sreenivasan looks at what's at stake in that battle.
We're talking about what's known as the pass-through tax rate. It sounds obscure, but it's a rate affecting millions of businesses, ones that are not corporations, per se. And it's called pass-through because the income of these businesses is passed through, so the owner pays the individual tax rate, typically higher than the corporate rate.
It affects the kind of classic small business you might think of, say, the corner dry cleaner, but it's not just limited to just those. Hedge funds, partnerships, and law firms also can pay this rate. Some Republican senators held out to adjust that tax as part of the deal.
Jim Tankersley of The New York Times is here to help walk us through this.
Jim, I have had a couple of different examples here, but help me understand, who is the primary beneficiary of pass-through rates?
Sure. It's a lot of people.
And it's — just as you said, it starts with that small corner store, mom and pop store, and goes all the way up to lobby shops here in Washington and big law firms.
It's really any corporation — well, sorry — any business that is not a corporation. And in particular, it's a huge amount of economic activity right now in the United States. The majority of money earned in America comes through pass-throughs, not traditional corporations.
So why is this rate or the adjustment of this rate so important to the people who benefit from this?
Well, they want a level playing field with corporations, who are also getting a big tax cut in this bill.
And so they have asked for a lot of special treatment compared to just regular workers who pay through all sets of the individual income tax.
What are the rates as of now and how would they change? I know that's still being negotiated to some level.
Well, that's true. There's still some moving pieces in the legislation. But, right now, if you're a pass-through owner, you can pay up to 39.6 percent. That's the top individual income tax rate.
The Senate bill would cut that rate to 38 percent for all individuals at the very top. And then, beyond that, for everybody, no matter what your rates are up and down the scale, they would give you a 20 percent deduction on the income you earn through your pass-through up to $500,000 for couples, $250,000 for individuals.
There's also a big range of small businesses, so to speak, that aren't corporations.
So, is there any idea of how many of these small mom and pop stores actually make enough money that they would benefit from not having to pay 39 percent, but maybe now down to 20 percent?
Well, the rate — it's a deduction, so it actually helps up and down the income scale. So if you pay the 25 percent rate now, and you get a tax cut here, a rate cut, then you're also going to get this deduction on top of that. That's going to help you.
It's going to help you if you pay the 12 percent rate. Now, interestingly, it is also going to also help, for example, the Trump Corporation, big companies that are again earning that top rate.
So, what you have here is a deduction, and what that deduction does is gives everybody up and down the scale some help.
So, there have to be some political considerations here of not wanting to look like you're helping one constituency over another.
Is it the size, or, I guess, is it the peer group of the Trump corporations? Are they likely to benefit more just because they're bigger?
Well, sure, yes. They make more money, so they're going to get more a break.
And, like I said, this special benefit phases out a bit. You only get to take a half of it after $500,000. But that's still a lot of money. It's still a big deduction, and, again with the reduction in rates overall, the businesses that earn the most are going get the bulk of the benefits.
And we already know that 70 percent of the benefits for pass-throughs in America go to the top 1 percent of American income-earners. So, it is a cut for small businesses. It is also a cut that will predominantly help the rich.
One of the larger narratives here is the struggle to define who benefits the most. Is it the corporations? Is it the middle class?
What do we know about the overall distribution of how this tax plan is coming together?
Overall, in the bill, what we see is sort of a mixed bag for anybody at any income level, but predominantly a tax cut that predominantly helps the rich, but also — in pure dollar figures — but also has a lot in it for most middle-class families, but not all of them.
There are millions of middle-class families who would actually see a tax increase under the bill right away. And under the Senate bill, at the end of the decade, all American families would see a tax increase because they — the individual income tax cuts expire at the end of 2025.
While we are wonking out about tax rates and a specific clause, lots and lots of things are related to taxes. And as this bill points out, there are so many different kind of riders to secure votes here, from protections of the unborn, education, of course, health care.
Lots of things are affected by taxes.
Well, and this bill would do more than just taxes.
Drilling in the Arctic National Wildlife Refuge, for example, in a small portion of it has been added to this bill, at the insistence of Senator Lisa Murkowski from Alaska.
There are several provisions like that. And in this last frantic hours of trying to line up the votes, you can expect Republicans to make even more changes, add even more perhaps extraneous and sometimes very central things to the bill in that attempt to win votes.
All right, Jim Tankersley of The New York Times, thanks so much.
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