FACT CHECK: Would Small Businesses Pay The Lowest Tax Rate In Over 80 Years Under The GOP Tax Plan?

David Sivak | Fact Check Editor

President Donald Trump claimed Tuesday that under the Republican tax plan the top marginal tax rate for small businesses would be the lowest since 1931.

“Under our plan, more than 30 million Americans who own small businesses will get a 40 percent cut to their top marginal tax rate,” said Trump. “This will be the lowest rate in more than 80 years.”

Verdict: True

The current Republican tax plan would reduce the top marginal tax rate to 25 percentthe lowest top rate since 1931. Most small businesses, however, currently pay an effective rate of less than 25 percent.

Fact Check:

Most small businesses in the U.S. are organized as “pass-through” companies – sole proprietorships, partnerships and S corporations – that don’t get taxed at the 35 percent corporate tax rate.

These small business owners report their business income on their individual tax returns, meaning the business earnings are instead subject to individual income tax rates of up to 39.6 percent.

The GOP tax plan would cap the tax rate for these businesses at 25 percent, which the Committee for a Responsible Federal Budget estimates would reduce revenues for the federal government by $500 billion over 10 years.

This lower rate would be the lowest top marginal rate for pass-through businesses since 1931. The top federal income tax rate has fluctuated over the subsequent decades, reaching a high of 94 percent in 1944 and a low of 28 percent in 1988.

Although the top rate would be capped at 25 percent, the average small business doesn’t pay a tax rate that high. According to a 2009 report from the Small Business Administration, the effective marginal tax rate for a small business is 19.8 percent.

For example, sole proprietorships make up about 70 percent of all private businesses and only pay an effective rate of 13.3 percent. Only S corporations, which make up about 14 percent of all private businesses, pay above the proposed 25 percent threshold.

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David Sivak

Fact Check Editor
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