Washington, D.C. — The 2017 tax cuts, signed into law by then-President Donald Trump and enacted with no Democratic support, made deep cuts to personal, corporate, and estate taxes that were heavily skewed to the wealthy. One of the law’s changes allowed owners of pass-through businesses—partnerships, sole proprietorships, and S corporations—to deduct 20 percent of their qualified business income when calculating their taxes.
A new Center for American Progress report explains why this pass-through deduction is costly, has failed to produce promised growth, disproportionately benefited the wealthy, and has encouraged businesses to game the tax code to maximize qualifying income and associated tax breaks. Some key takeaways from the report include:
- The wealthy received the majority of the benefits of the pass-through deduction. Tax filers with adjusted gross incomes (AGI) of $500,000 or more in 2021—the top 1.5 percent of filers—claimed more than half of all pass-through deductions, despite accounting for just 6 percent of all returns with the deduction.
- Pass-throughs facilitate gaming the tax system. The 2017 tax law, with its enactment of 199A, created incentives for pass-throughs to maximize the amount of income that qualifies for the tax deduction. Recent researchers have found strong evidence of pass-throughs recharacterizing income in a manner consistent with inflating the benefits they receive from the 2017 law change.
- The pass-through deduction widened racial disparities. A study by the Department of the Treasury’s Office of Tax Analysis estimates that white families accounted for 90 percent of the benefits of the pass-through deduction but only two-thirds of the tax-filing families in fiscal year 2023. By contrast, Black families—11 percent of tax filers—received just 2 percent of the benefits of the new deduction.
“The pass-through deduction enacted as part of the 2017 tax act disproportionately benefits the wealthy, widens racial disparities, and fails to produce promised jobs or investment,” said Jean Ross, senior fellow of Economic Policy and author of the report. “Congress should allow this costly and ineffective provision to expire as scheduled.”
Read the report: “The 2017 Tax Bill’s Pass-Through Deduction Largely Favors the Wealthy and Encourages Gaming of the Tax Code” by Jean Ross
For more information on this topic or to speak with an expert, please contact Sarah Nadeau at [email protected].