US tax policy deprives the government of revenue and overwhelmingly serves the interests of the rich<\/p>\n
After the House passed its version of Donald Trump\u2019s One Big Beautiful Bill Act (OBBBA) last year \u2013 the one that paired a $5tn-plus tax cut with $1tn-plus of cuts from food stamps and Medicaid \u2013 the House speaker, Mike Johnson, explained that \u201cthis is not giving tax cuts to the millionaires\u201d. The beneficiaries, he said, were \u201csmall business owners\u201d that \u201cprovide the jobs in every community in America\u201d.<\/p>\n
Johnson was playing to the myth of the modest, sturdy Main Street job creator. It is an appealing story. It\u2019s also the most consequential piece of BS distorting American policy that deprives the government of tax revenue, stunts American capitalism, twists regulations, thwarts competition and overwhelmingly serves millionaires\u2019 interests.<\/p>\n
The speaker was specifically talking about \u201cpass through\u201d businesses. About 95% of businesses in the country take this form. They employ half of all workers and generate more than half the nation\u2019s business income. These creatures of the tax code are freed from paying the corporate income tax rate. Instead, their untaxed profits are distributed to their owners, who generally face lower individual tax rates, saving them billions.<\/p>\n
Republicans have consistently gone to bat for pass throughs. In 2017 Ron Johnson, the Republican senator from Wisconsin, threatened not to vote for Trump\u2019s Tax Cut and Jobs Act, relenting only after the Senate increased a tax deduction for pass-through business income from 17% to 20%. \u201cI just have it in my heart a real affinity for these owner-operated pass-throughs,\u201d Johnson said at the time.<\/p>\n
That deduction, made permanent in the \u201dbig beautiful bill\u201d last year, will cost the budget $820bn over a 10-year period, almost as much as was cut from the Medicaid budget.<\/p>\n
About 57% of the $1.3tn in pass-through income in 2022 went to 890,000 people in the richest 1% of the population, according to the Urban-Brookings Tax Policy Center. A study by economists at the Department of the Treasury, the Federal Reserve Bank of Minneapolis and Dartmouth University found that 35% of the total deductions in the year after the 2017 tax cut, a cold $54bn, flowed to taxpayers with income of at least $1m.<\/p>\n
Johnson and Johnson know this. Senator Ron owned a stake in a pass-through, a plastics maker in Oshkosh, which he sold in 2020 for between $5 and $25m and upon which he built a fortune worth about $40m in 2018, making him the sixth-richest senator at the time. Speaker Mike, a man of \u201cmodest means\u201d, lives in a $3.7m townhouse steps from the US Capitol owned by the millionaire Republican donor Lee Beaman, who made his fortune from a string of car dealerships.<\/p>\n
Next month, economists Owen Zidar from Princeton and Eric Zwick from the University of Chicago will publish a panoramic profile of these \u201ceverywhere millionaires\u201d. They are your dentist and doctor, the car dealer and the insurance salesman, the lawyer and the real estate developer, the accountant, the consultant and the building equipment contractor.<\/p>\n
They have largely organized themselves as pass-throughs. Many are amazingly rich. Zidar and Zwick estimate that for every billionaire in the Forbes 400 list, there are more than 4,000 Main Street millionaires worth at least $10m. Their net worth adds up to $46.7tn, nearly 12 times as much as that of the Forbes plutocrats.<\/p>\n
The political system is at their mercy. Consider Trump\u2019s \u201dbig beautiful\u201d tax cut last year. The 20% deduction granted to pass-through profits means that the top income tax rate for their rich owners is only 29.6%. For people who earn wages, the top marginal rate is 37%.<\/p>\n
Concern over the political power of the plutocracy has focused on billionaires. But Main Street millionaires flying under the radar might be more influential. Political action committees (Pacs) run by the National Association of Realtors, the National Beer Wholesalers Association and the National Automobile Dealers Association were among the top 10 by donations in the 2023-24 cycle.<\/p>\n
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And Main Street millionaires play in politics themselves, at the federal, state and local level. Car dealership millionaires Don Beyer from Virginia, Vern Buchanan from Florida and Mike Kelly from Pennsylvania sit on the House ways and means committee. They are probably not unhappy about the pass-through deduction, nor about the deduction for new auto loan interest that also made it into the OBBBA, which Zidar and Zwick estimate will cost the budget $5bn to $10bn a year for four years.<\/p>\n
Though tax breaks may be their top concern, the damage to the republic runs deeper. In 1997, doctors got the federal government to freeze the number of residency positions funded by Medicare, a neat way to limit the availability of new doctors. That helps explain why there are only 2.7 doctors per 1,000 people in the US, compared with 3.7 across the other OECD countries, and why 26% of American doctors fit in the richest 1% of the population, compared with only 5% in Sweden, despite Americans\u2019 comparatively tenuous hold on life.<\/p>\n