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Rich could get nearly $2 trillion tax cut under Trump's tax loophole

  • A change in how pass-through income is taxed could cost as much as $1.95 trillion over 10 years, a report found.
  • The Tax Policy Center said that three-quarters of the benefit from the tax cut would go to the top 1 percent of earners.
President Donald Trump boards Air Force One at Lynchburg Regional Airport May 13, 2017 in Lynchburg, Virginia.
Brendan Smialowski | AFP | Getty Images
President Donald Trump boards Air Force One at Lynchburg Regional Airport May 13, 2017 in Lynchburg, Virginia.

President Donald Trump's tax treatment of pass-through income could cost as much as $1.95 trillion over 10 years, according to a new analysis. And more than three-quarters of the cut would go to the wealthy.

The Tax Policy Center said that if Trump's plan to tax pass-through income at 15 percent takes effect, federal tax revenue could drop by $1.36 trillion over a decade. Adding in the amount of income that would "shift" to take advantage of the pass-through rate would raise the total to $1.95 trillion.

Trump's tax proposal calls for cutting the rate for income that "passes through" limited liability companies, sole proprietorships and S-corps to 15 percent, to match the reduction in the corporate tax rate. Yet critics say the reduction will cause people to turn their ordinary income into pass-through income and get the lower rate than the 35 percent top tax rate proposed by Trump.

Pass-through income mainly benefits the wealthy. The Tax Policy Center said that three-quarters of the benefit from the tax cut would go to the top 1 percent of earners. They would see an average increase in their after-tax income of 4.8 percent, or about $76,000.

The very wealthy would see the biggest gains: Those in the top one-tenth of 1 percent of the income distribution — those with incomes exceeding $3.4 million — would receive an average tax cut of almost $638,000.

By contrast, fewer than 5 percent of households in the middle quintile of the income distribution would see a reduction, averaging about $370.

"Lowering the tax rate on pass-through income would affect few taxpayers in the middle or bottom of the income distribution but provide large tax reductions to a relatively small number of households at the top of the income distribution," the Tax Policy Center said.

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