Tax reform continues to move forward and one widely discussed aspect is the treatment of so-called “pass-through” businesses, like sole proprietorships and partnerships, which employ over half of the workforce. A paper released today from National Taxpayers Union Foundation (NTUF), “What’s the Deal with Pass-Through Taxation?”, is informing this discussion with hard-hitting analysis. NTUF shows that both the House and Senate version of the Tax Cuts and Jobs Act (TCJA) would substantially reduce taxes for small businesses, with pass-through rates remaining significantly lower than corporate burdens. The paper is the latest in a series from NTUF on key issues in tax reform.
Andrew Moylan, author of the paper and Executive Vice President of NTUF, said, “Tax treatment for pass-throughs has been a significant sticking point in tax reform thus far, but small business advocates can rest easy that both the House and Senate are moving in the direction of providing significant relief. Both bills promise rate reductions and simpler tax compliance for pass-through businesses, which employ millions of Americans.”
Among the findings in the paper are that top marginal rates for pass-throughs would drop more than four percentage points under the House plan and nearly eight percentage points with the Senate bill. Additionally, pass-throughs would benefit from the expanded standard deduction, lower rates, and myriad accounting and expensing improvements embedded in each bill. They would therefore continue to enjoy a significant tax advantage when compared to traditional corporations, even with TCJA’s enactment of a permanent 20 percent statutory corporate tax rate.
Moylan concluded, “Getting pass-through taxation right is a vital component of any pro-growth tax reform package. While they take different approaches, both the House and Senate tax bills offer significant tax reductions to the millions of sole proprietorships and partnerships that pay taxes through the individual code. The only way to leave these businesses ‘high and dry,’ as some have worried, would be to stymie tax reform entirely and leave America stranded with the status quo.”
This paper is the fourth in a series titled “What’s The Deal With…”, each of which is designed to provide non-technical explanations of a highly technical tax policy issue – and options for addressing it. Previous editions discussed base erosion, cost recovery policy, and the state and local tax deduction.
NTUF is a non-partisan research and educational organization dedicated to showing Americans how taxes, government spending, and regulations affect them. More information is available at ntu.org/foundation/.