It isn’t at the Mom-and-Pop store. Or even the Mom-and-Pop accounting firm.
“Firms with receipts over $50 million accounted for more than 40 percent of pass-through revenues [in 2005],” Donald Marron of the centrist Tax Policy Center told a congressional subcommittee in 2011, citing data from the Joint Committee on Taxation, “and those with receipts over $10 million accounted for almost 60 percent of pass-through revenues.”
If the profits that flow from these revenues are taxed at a lower rate or not at all, Gardner said, “sure, there are benefits to actual small businesses, but they’re almost incidental.”
What will it cost?
So if wealthier business owners are the biggest beneficiaries, will they use their newfound tax savings to create jobs in their states, as the Show-Me Institute and like-minded groups promise?
Not according to the Center on Budget and Policy Priorities. The center-left fiscal think tank argued against the Kansas pass-through exemption in March 2012, claiming that “[a] substantial share of the profit exempted from taxation under the proposal is earned by the wealthy owners of large investment funds and other business entities that have no employees.” The CBPP authors also noted that new jobs tend to be created by young small companies that aspire to become big—but because businesses typically earn little profit to pass through to their owners at that stage, they would see little benefit from the cut.
It’s possible that the statistics on the concentration of revenues among an elite set of pass-through corporations is skewed by financial centers like New York, and that the picture is a bit different in Kansas and Missouri. Private companies aren’t required to disclose their tax status, and state-by-state data on pass-through entities is hard to come by.
But these objections do raise the question that reporters need to be asking lawmakers as these unprecedented tax cuts zoom through their legislatures: What is the evidence that the benefits of these untested measures—in jobs created, economic growth, or new opportunities for entrepreneurs—will outweigh the costs, in terms of diminished tax revenues, distortions to business decisions about corporate structure, and in all likelihood a more regressive tax burden?
With the revised bill clearing the legislature this week, it’s almost too late to put this question on the news agenda. But Young’s article in Thursday’s Post-Dispatch, about Senate passage of the measure, is a good start. The story notes up high that the pass-through provision is a “centerpiece” of the bill; farther down, it notes the benefits for well-heeled consultants, and the doubts about how many jobs those benefits might create.
Here’s hoping her fellow statehouse reporters will start asking some of the same questions as the measure heads to Nixon’s desk.
Author’s note: Lest the reader detect any bias here against the beneficiaries of the pass-through tax cut, it may be noted that, in researching this story, I was pleasantly surprised to learn that I am one of them. As a Kansas-based “Mom-and-Pop” freelancer—a sole proprietor—I am greatly indebted to Gov. Brownback for his largesse. Whether I will make use of this windfall to join the ranks of the job creators remains uncertain. I will at least have more cash in my pocket to head out to the mall and goose the Kansas economy, although the governor’s proposed sales-tax hike extension may give me pause.
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