Trump’s Small Business Rates will Lead to $1 Trillion in Tax Avoidance

[4/29/17/ SALLY W]  President Trump’s well publicized plans to implement a special tax rate for small businesses will lead to losses in excess of $1 trillion over the next ten years. That is the stark warning from economists at Goldman Sachs, who predict that high earners and corporations will seek to game the system.

The new tax rules rules are designed to kick start the small business economy and have been well received by SMEs, entrepreneurs and providers of Corporate Business Solutions. However, the latest warning suggests that others will try to take advantage of the new rate, with the potential for huge losses to the US economy.

Pass throughs

The problem stems from the special tax rate that Trump plans to introduce for so called “pass through” businesses – these are ones whose earnings are passed through directly to their owners, who then pay tax on their individual rates.

Many pass through businesses are small or medium sized enterprises and partnerships. However, there are some major organizations too, which currently face the top tax rate of 39.6 percent.  As it happens, the Trump Organization is one such business.

The fear is that the new rules could cause a rush of major companies seeking to become pass throughs in order to significantly reduce their tax bill by avoiding the secondary layer of dividend taxes.

Playing the System

At present, the 15 percent rate is only available to those with an annual income of less than $37,950. However, anyone whose income is made as a pass-through entity would be guaranteed that rate, regardless of their income.

In other words, according to Goldman Sachs’ economists Alec Phillips and Daan Struyven, high earners might seek to play the system by essentially setting themselves up as a pass through and thereby reducing their individual income tax from the top rate of 35 percent.

And who is the wealthiest of them all? Well, according to market analysts, it could save Donald Trump several million dollars a year.

Good news for small businesses

It is easy for the cynics to scoff, but the fact is that regardless of the potential for self interest in the upper echelons, the tax reforms are welcome news for small businesses. Congress is absolutely confident that it can legislate to avoid the tax avoidance implications, while economists and political commentators remain unconvinced. Only time will tell.

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