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Trump's Tax Cuts Would Boost Wealthy's 'Pass-Through' Businesses

The majority of tax cuts in Trump's new plan will go to the wealthiest households, according to estimates.
Image: Donald Trump
President Donald Trump speaks about tax reform on Aug. 30, 2017, at the Loren Cook Company in Springfield, Missouri.Alex Brandon / AP

President Donald Trump is unveiling further details Wednesday on a tax reform plan that is being hyped as offering “the biggest tax cut in history” — but for whom?

Despite the president's comments earlier this month that his plan will “benefit the middle class and benefit companies, where they're going to be producing jobs," early estimates note that the majority of tax cuts will instead go to the wealthiest households.

And some of the very wealthiest get to enjoy a new benefit: Trump is proposing a 25 percent tax on “pass through” businesses, where corporate income "passes through" the business to the owner, who is then taxed at the individual tax rate. Ostensibly created to help small businesses, the pass-through tax is used more and more by top earners to circumvent a higher personal rate.

Around 95 percent of all American businesses, or about 27 million, are "pass throughs" — mainly mom and pop firms — but their popularity has exploded in recent years among the wealthy to keep more of their income, because individuals can use extra deductions and losses to bring their effective tax rate far below the standard corporate tax rate of 35 percent.

Related: Republicans Prepare to Unveil Expensive Tax Reform Outline

Trump is proposing a new 25 percent tax on these pass throughs to replace this system. That would essentially reduce the rate for businesses within that tax bracket by 14.6 percentage points.

Proponents said it would incentivize small businesses to reinvest in their own firms.

The majority of pass-through income, however, is going to those in the top tax brackets, according to an analysis by the Tax Policy Center in Washington. Those begin at $470,000 for married couples filing jointly, $418,400 for unmarried.

They calculated that more than 85 percent of the net tax benefit would then go to the top 1 percent of earners.

"Thus, any cuts in the tax rate on pass-through businesses would largely benefit high-income taxpayers," wrote left-leaning Brookings Institute think tank authors Aaron Kruplin and Adam Looney.

But others say you shouldn't throw the baby out with the bathwater.

"Just because it also benefits hedge funds doesn't mean it won't let small businesses keep more of their income," Michael Strain, director of economic policy studies at the right-leaning American Enterprise Institute think tank, told MSNBC.