Washington, D.C. — The 2017 tax cuts, signed into law by then-President Donald Trump and enacted without Democratic support, introduced significant reductions in personal, corporate, and estate taxes that predominantly benefited the wealthy. A notable change in the law 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 report from the Center for American Progress outlines why this pass-through deduction is costly, has failed to generate the anticipated economic growth, disproportionately benefits the wealthy, and incentivizes businesses to manipulate the tax code to maximize qualifying income and associated tax breaks. Key findings 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 while representing just 6 percent of all returns with the deduction.
Pass-throughs facilitate gaming the tax system. The 2017 tax law's enactment of Section 199A created incentives for pass-throughs to maximize qualifying income for the tax deduction. Researchers have found substantial evidence indicating that pass-through entities are recharacterizing income to inflate benefits derived from this law change.
The pass-through deduction widened racial disparities. According to a study by the Department of the Treasury’s Office of Tax Analysis, white families accounted for 90 percent of the benefits from the pass-through deduction but only two-thirds of tax-filing families in fiscal year 2023. Conversely, Black families—11 percent of tax filers—received just 2 percent of these benefits.
“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 in Economic Policy and author of the report. “Congress should allow this costly and ineffective provision to expire as scheduled.”
Read Jean Ross's report: “The 2017 Tax Bill’s Pass-Through Deduction Largely Favors the Wealthy and Encourages Gaming of the Tax Code.”
For more information on this topic or to speak with an expert, please contact Sarah Nadeau at [email protected].
