Ever since ProPublica, a progressive news organization, somehow got access to a collection of confidential taxpayer information, it has blasted out a series of half-baked exposés intended to give the impression of shady back-room deals and endemic corruption cooked into the tax code. But once one looks past the smoke and mirrors, it becomes clear that ProPublica is grasping at straws to present as revelatory information that we already knew.
The latest example is a report that purports to show that the so-called Section 199A deduction for pass-through businesses included in the 2017 Tax Cuts and Jobs Act (TCJA) was “bought” by a few wealthy donors for their own personal benefit. The narrative goes that Sen. Ron Johnson was a strong advocate for the expanded pass-through deduction — and that the deduction passed — because some of Johnson’s donors benefited financially from the deduction.
But that’s a stretch. The pass-through business deduction affected business owners whose business profits “pass through” to get taxed in the individual income tax code, rather than the corporate tax code. Most businesses that are not C corporations, including many small- to medium-sized businesses, are taxed in this manner. In fact, the vast majority of companies are pass-through entities, representing some 90 percent of businesses and 57 percent of employment. That some of Sen. Johnson’s significant financial backers were pass-through business owners is not particularly surprising.
There was also good reason for pass-through tax relief to be included in the TCJA. A central reform of the tax reform package was a much-needed corporate income tax rate cut from 35 percent to 21 percent. But absent corresponding changes to tax rates for pass-through businesses, this could have created a significant tax imbalance between C corporations and pass-throughs.
Enter the pass-through deduction. Originally, the TCJA would have allowed pass-through business owners to deduct 17.4 percent of their pass-through income from federal income taxes. After Johnson’s intervention, the deduction was increased to 20 percent.
Of course, ProPublica misleadingly ascribes the entire deduction to Johnson personally, as if there was no appetite from other legislators to ensure that C corporations were not favored over pass-through businesses. In calculating the tax savings that pass-through owners who donated to Johnson received from the deduction, ProPublica ignores that Johnson was, at most, the difference between a 17.4 percent deduction and a 20 percent deduction, not the reason for the deduction existing at all.
After all, the majority of pass-through businesses are very small, with less than five employees. Had the deduction been left out, perhaps organizations like ProPublica would have blasted the TCJA for favoring large corporations over small businesses.
Section 199A is not perfect. It’s excessively complicated, and despite extensive anti-abuse provisions it is not airtight. But while there is room for improvement, it’s simply incorrect to present the deduction it creates as a corrupt handout that was the handiwork of one Senator on behalf of his wealthy benefactors. Good tax policy should never arbitrarily favor certain types of businesses over others.
Even where Democrats have proposed reforms to Section 199A, they have not sought to eliminate it. Senator Ron Wyden (D-OR), for example,proposed changes recently that would have phased out the deduction at higher income levels, but in the process would expose the deduction to further abuse by removing restrictions on service workers like accountants and lawyers using the deduction. Different parties have different approaches to reforming the deduction, but no serious policymaker advocates simply eliminating it.
ProPublica appears determined to milk its ill-gotten tax trove for all it’s worth, and in the process misinforming the readers they’re supposed to be educating about the complicated topic of tax policy. Taxpayers should be sure not to let the organization’s scandal-mongering influence the serious work of crafting a sound tax code.