Tax committee report: Much of tax law’s pass-through benefit goes to the wealthy

Much of the tax benefit from the new tax law’s deduction for pass-through businesses will go to wealthy individuals, according to a Joint Committee on Taxation report released Monday.

About 44 percent of the tax benefit from the deduction will go to those with an income of $1 million or more in 2018, and 52.4 percent of the benefit will go to those with income in that range in 2024, the congressional tax scorekeeper estimated.

The tax law provides a new 20 percent deduction for income from pass-through businesses, which are businesses taxed through the individual code on their owners’ returns. Pass-throughs can include many small businesses, as well as larger firms such as real estate companies.

Republicans included a tax break for pass-throughs in the new tax law because they were also cutting the tax rate for corporations and wanted to level the playing field between corporations and small businesses. The measure includes some provisions designed to prevent wealthy individuals from using the new deduction to avoid taxes.

But Democrats have had concerns that the deduction would provide the biggest benefit for the wealthy and make taxes more complicated for many small-business owners.

The business community is eagerly awaiting IRS guidance on the new deduction because of its complexity.

Senate Minority Leader Charles Schumer (D-N.Y.) said in a statement that the Joint Committee on Taxation’s report provides “more evidence that the GOP tax bill was in fact designed to tip the scales in favor of the wealthiest Americans at the expense of middle-class families.”

But Ryan Ellis, a senior tax adviser for the Family Business Coalition disagreed. He noted that committee’s report also shows that much of the benefit of the pass-through deduction, including a majority in 2018, goes to people with incomes of less than $1 million.

While Democrats argued that those who weren’t rich wouldn’t benefit from the tax law, “this table argues against the Democrats’ principal narrative about the tax law,” he said.

The Joint Committee on Taxation released new tables about the tax law ahead of a Senate Finance Committee hearing scheduled for Tuesday on the measure. 

The tables also show that fewer people would take the deductions for mortgage interest and state and local taxes under the new law, particularly if they are not high earners. The new tax law places new limits on those deductions and also increases the standard deduction, making it less likely that taxpayers will take itemized deductions.