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The recent tax legislation championed by former President Donald Trump, known as the One Big Beautiful Bill Act (OBBBA), has ignited a heated debate over its implications for the US economy. Despite claims from lawmakers like House Speaker Mike Johnson that the legislation primarily benefits small business owners, analysis reveals that it disproportionately favours the wealthiest Americans, including millionaires and billionaires, while draining crucial government revenue.
A Closer Look at the OBBBA
Last year, the House approved the OBBBA, which included an extraordinary $5 trillion tax cut paired with over $1 trillion in reductions to essential programmes such as food assistance and Medicaid. Johnson defended the bill by stating that it is not a boon for millionaires but rather a measure to support small businesses that create jobs in local communities.
However, this narrative obscures a more complex reality. The majority of American businesses operate as what are known as “pass-throughs,” allowing their profits to be taxed at individual rates rather than the corporate tax rate. This system results in significant savings for affluent owners, as they benefit from lower tax rates that effectively reduce their overall tax burden.
The Reality of Pass-Through Taxation
Currently, around 95% of US businesses are structured as pass-through entities, which employ half of the American workforce and generate over half of the nation’s business income. The 20% tax deduction for pass-through income included in the OBBBA stands to cost the federal budget an estimated $820 billion over the next decade. This figure is nearly equivalent to the cuts imposed on Medicaid, demonstrating a stark prioritisation of tax relief for the wealthy over public health support.
Statistics reveal that a staggering 57% of the $1.3 trillion in pass-through income in 2022 was concentrated in the hands of the top 1% of earners. A study from leading economists found that approximately 35% of deductions claimed in the wake of the 2017 tax changes—totaling around $54 billion—went to individuals with incomes exceeding $1 million.
The Political Influence of Affluent Americans
The political landscape is heavily influenced by these ‘everyday millionaires,’ who often escape scrutiny compared to their billionaire counterparts. Research by economists Owen Zidar and Eric Zwick indicates that for every billionaire, there are over 4,000 millionaires, primarily individuals such as doctors, lawyers, and business owners—many of whom have organised their finances through pass-through entities.
This demographic has significant sway over political decisions. The top political action committees (PACs) in the 2023-24 cycle include organisations representing car dealers, realtors, and others that stand to gain from tax breaks and regulatory advantages. These affluent individuals often occupy key positions in government, thereby shaping policies that maintain their economic privileges.
Wider Implications for Society
The ramifications of such tax policies extend beyond mere financial statistics. For instance, the medical community has benefitted from regulations limiting the number of residency positions, resulting in a shortage of doctors relative to other developed nations. This contributes to lower healthcare access and higher incomes for doctors, a situation that starkly contrasts with countries like Sweden.
Moreover, various industries, such as automotive and real estate, have established protections that hinder competition and limit consumer choice. Franchise laws prevent new car dealerships from entering markets, while real estate practices often involve monopolistic fees that drive up costs for homeowners.
Why it Matters
The OBBBA exemplifies the widening chasm in American economic policy, wherein the interests of the wealthy overshadow the needs of the broader population. As tax cuts favouring millionaires and billionaires remain in place, critical social programmes face funding cuts, exacerbating inequality and limiting opportunities for the average American. The long-term effects of such policies could hinder economic mobility and stifle competition, ultimately undermining the very foundations of American capitalism. It is imperative for policymakers to reassess tax structures in a way that promotes equity and sustainable growth, rather than perpetuating a system that disproportionately favours the richest among us.