Now that both the House and Senate have each pass their own versions of a tax bill, it will be the job of a conference committee composed of three members from each chamber to fashion a compromise incorporating elements of both bills.  Both a majority of members in both chambers would then have to approve the compromise.

Both chambers voted to drop the corporate income tax rate from the current 35 percent to 20 percent, and make the change permanent. (The Senate version would delay the change until 2019; the House bill makes the change effective in 2018.)

However, the House and Senate bills take a much different approach on how to treat “pass-through” businesses, which under the current tax code, pay taxes on business income via the owner’s individual income tax rate.  Many small businesses are pass-through businesses.

The Senate offers higher tax rates on pass-through income, in general, than the House bill.  The House bill cuts the top rate down as low as 25 percent; the lowest rate in the Senate bill is 29.6 percent. (The Senate adopted a 23 percent deduction for pass-through income–limited to 50 percent of wage income–for qualifying businesses.) And, unlike the House bill, the Senate bill pass-through provisions sunset in 2025.

For people like lawyers or accountants whose pass-through earnings are more like wages, the House bill has a slightly higher top rate than the Senate bill.  That’s because the House bill presumes that 70 percent of pass-through is wage income (subject to the regular individual income tax rate and 30 percent is business income subject to the lower pass-through rate cap).  This is the House’s so-called 70-30 rule, but does it fully close the loophole?

Politico reported today that some tax lawyers see the plans  to cut taxes on pass-throughs as opening up a new loophole for the very wealthy–hedge fund guys, real-estate tycoons and the like–to recharacterize portions of their income as profit in order to receive a huge tax cut.  For somebody making $500,000, that would save them $30,000.

Wealthy “passive” owners–who don’t work directly for the company they own and more often than not are owners in name only, fronting the cash for their stake in the company but not running day-to-day operations–would still qualify for the special 25 percent pass-through rate on 100 percent of their “passive” net business income under the House bill.

President Trump, for example, in addition to many of his Cabinet members, as well as his son-in-law and senior adviser Jared Kushner, are the owners of passive pass-through businesses. The Trump Organization reportedly has at least 500 of them.

So, I think there will be lots of negotiation in the conference committee over how to treat pass-throughs.  There are clear differences between the House and Senate bills.  For sure, there is not the unanimity on how to tax small businesses as there is on corporations.