Let’s Make “Pass-Through Income” a Household Word

I’ve begun to sense a disturbance in the force: there’s a part of the Republican tax cut plan that even a lot of conservatives are having a hard time with. That’s not because it’s a cut, but because it seems like a large and wholly abitrary cut to a small and very specific set of favored people.

The subject is pass-through income. If you’re, say, a partner in a law firm, the firm almost certainly doesn’t pay corporate taxes. Rather, it’s organized as a partnership or S-corporation. This means that its profits are distributed directly to the partners, who then pay individual taxes on the income. Most hedge funds, private equity funds, law, consulting, and accounting firms are partnerships.

In other words, most people with pass-through income aren’t folks who own a dry cleaning shop or a roadside diner. They’re highly compensated professionals who are paying a top income tax rate of 39.6 percent. Under the Republican plan, this would be reduced to 25 percent, while the top individual rate would be reduced to 35 percent.

But why? Why should a Fortune 500 CEO pay 35 percent while a white shoe lawyer pays 25 percent? What’s the rationale for this? Why should the tax code provide this windfall to a small and very select group of taxpayers?

According to TPC’s estimates, the pass-through provision accounts for nearly a third of the total cost of the Republican tax plan. And it seems wholly unjustified, even by conservative principles. With a little work, I suspect that a focus on the pass-through provision could be pretty effective. It’s obviously unfair and there are probably several conservative senators who are already on the fence about it—especially if the cost of the bill gets slashed by a third if they eliminate it.

It’s just a thought, but it might be a good idea for liberals to make pass-through income a household word.