The Most Uselessly Expensive Part of the GOP Budget Bill
Congress wants to make the pass-through tax deduction permanent, which would cut revenue by at least $700 billion over the next decade. It’s a bad idea.
Pointless provision.
Photographer: Saul Loeb/AFP/Getty Images
The landmark 1986 tax reform legislation cut the top individual income tax rate in the US to 28% from 50% and the top corporate rate to 34% from 46%. With that change, the tax treatment of standard corporations — known as C corporations, for the subchapter of the Internal Revenue Code that applies to them — became starkly less favorable than that of businesses that pass their tax liability through to their owners who then pay individual income taxes on it.
It wasn’t just that the top individual rate was now lower than the top corporate rate. Corporate owners are taxed twice: first when the corporation pays income taxes and again when they pay taxes on the dividends they receive or the capital gains they realize upon selling shares. With dividends at the time taxed as ordinary income, corporate shareholders in the highest income bracket thus faced an overall tax rate of 52.5% on those dividends compared with the 28% that pass-through business owners paid on their earnings.