Businesses that are structured as S corporations, partnerships, LLCs, and sole proprietorships do not pay the corporate income tax at all. Instead, their owners pay taxes on their share of the business’s income at regular individual income tax rates, which range from 10 percent to 39.6 percent.
Trump and GOP congressional leaders have proposed capping the tax rate on pass-through business profits that individuals receive at 25 percent. Since that would significantly lower the tax rate for business owners who are currently in higher tax brackets, this proposal would cost $769 billion over the next decade.
Trump and the congressional GOP claim this tax cut is for “small” businesses, but most actual small businesses won’t benefit much, if at all, from this change. Over 86 percent of pass-through businesses already fall in the 25 percent tax bracket or lower, and over 50 percent currently fall in the 15 percent bracket or lower. The people who will benefit from the change are very wealthy business owners—such as hedge fund managers, lobbying and law firms, real estate financiers, and big businesses that are organized as pass-throughs but compete with large corporations.
This proposal would also likely create a new avenue for wealthy individuals to avoid taxes by re-characterizing their high salary as business income that would qualify for the lower rate. This can be accomplished, for example, by creating an LLC to receive their salary, then paying the preferential tax rate on the “profits” they receive from the LLC.