Options to Reduce the Taxation of Pass­‐through Income

The Trump administration and House Republicans are developing proposals that would reduce the individual income tax rate on income earned through pass-through entities such as sole proprietorships, partnerships, and S-corporations.

To analyze the impact of reducing the individual income tax rate on pass-through income, we use TPC’s microsimulation model of the federal tax system to estimate the revenue and distributional effects of several illustrative options relative to a baseline that repeals the individual alternative minimum tax (AMT) and implements ordinary income tax rates of 12, 25, and 33 percent. We provide estimates for two different definitions of qualifying pass-through income—a broad base and a narrow base—and for two different top pass-through tax rates, 15 and 25 percent.