A report last month by Brookings raised some interesting questions about the proposed tax-reform plans of the Trump administration and House Republicans. Both propose large reductions in taxes paid on business income, including taxes paid by owners of pass-through businesses.  Pass-throughs–which include limited partnerships such as real estate, law firms and hedge funds–have their income pass through to their owners to be taxed under the individual income tax. The Trump plan would reduce the corporate rate from 35 to 15 percent and the top rate on income earned from pass-through business from 39.6 to 15 percent.

Here are the main points of the Brookings analysis:

• Most businesses are pass-throughs.  Of the 26 million businesses in 2014, 95 percent were pass-throughs while only 5 percent were C-corporations.
• Almost all businesses are small.  In 2014, almost 99 percent of businesses had $10 million or less in sales and receipts.
• Pass-throughs are not necessarily small business. A small number of large businesses account for the majority of pass-through profits and economic activity.
• Pass-through businesses now earn a majority of business income.  In the early 1980s, C-corporations produced almost all business income. In 2013, only 44 percent of the income of business owners was earned through C-corporations.
• Pass-through businesses pay lower tax rates than C-corporations.  The gap between the lower rate on pass-throughs and the higher rates faced by C-corporations creates a major incentive for businesses to un-incorporate and to organize as pass-throughs.
• The multitude of business types encourages inefficient tax avoidance.  With so many options to choose from when determining how to structure a business and whether to distribute business income as profits, wages or capital gains, business owners have considerable incentive and ability to avoid tax.
• The growth of pass-through businesses has eroded corporate and payroll revenues. If the relative shares of pass-through and C-corporate activity were held at 1980 levels, the average tax rate on business income in 2011 would have produced at least $100 billion in additional revenue in 2011 alone.
• Pass-through income is primarily earned by high-income individuals.  About 70 percent of partnership income accrues to the top 1 percent, compared to less than 50 percent of corporate dividends and 11 percent of wages.
•  Pass-through businesses are responsible for a significant share of the tax gap. About 41 percent of the tax gap from 2008-2010, or $190 billion, was due to pass-throughs underreporting income and thus paying too little income tax.

To my way of thinking, if most of these changes come to pass, the biggest winners will be high-wealth individuals, not small businesses, and government funds for services such as infrastructure,  retirement and healthcare for seniors  will be more scarce.

Brookings’ research noted that the growth of pass-through businesses has eroded the payroll tax base, which funds the Social Security, Disability and Medicare trust funds. In 2011, about 71 percent of pass-through income was subject to Social Security or Medicare taxes; in 1994, the share was greater than 88 percent. Republican healthcare proposals, if passed, would make this chasm even wider.

Individuals in the bottom 80 percent earn virtually no pass-through income.  Moreover, those with higher incomes tend to receive a much greater share of their income from business compared to those with lower incomes, as the top 1 percent earn only about 11 percent of wage and salary income. Thus, any reductions in the tax rate on pass-through businesses, while it might benefit some small businesses, would largely benefit high-income taxpayers.  It’s what economists call “upward redistribution.”

Finally, pass-through businesses already aren’t paying their fair share, and are primarily responsible for the tax gap, according to Brookings. The tax gap measures the amount of tax liability that should be paid but is not. About 41 percent of  the $190 billion tax gap from 2008-10, was due to pass-through businesses underreporting income for income and payroll tax purposes.  Sole proprietors were responsible for about 30 percent of the individual income tax underreporting tax gap.