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Trump Proposes Small Business Tax Cuts, Financial Experts Warn It Will Be Costly

Across the nation, there are almost 28 million small businesses, including more than 22 million self-employed entrepreneurs with no additional payroll or employees. Throughout the 2016 presidential election, President Donald J. Trump pledged to protect these small business owners by cutting their tax rates; however, some economists predict that this reduced business tax rate will also add trillions of dollars to the national deficit.

MoneyOn May 3, President Trump released an outline of his tax plan, which includes a 15% tax rate for small businesses. While this may seem beneficial in the short-term, economists for Goldman Sachs disagree.

An estimated 82% of businesses fail as a result of cash flow problems. Bank economists Daan Struyven and Alex Philips believe that this tax break will lead to around $1 trillion in tax avoidance over the next decade. This is because they believe high-earning corporations would take advantage of the new tax code by applying to become “pass-through” entities. This status would allow them to avoid paying certain taxes.

A pass-through business allows its owners to avoid so-called double taxation. These entities don’t have to pay corporate taxes; instead, the business’s income is passed through to the owners, who only pay personal income taxes on that revenue. If Trump’s tax plan also lowered the tax rate for pass through businesses to 15%, experts say the country could lose up to $4 trillion in revenue.

The three most common types of business organization are C-Corporations, S-Corporations, and Limited Liability Companies (LLCs). These entities all have different ways of expressing ownership. For example, LLC ownership can take two forms: either a percentage of ownership or membership units, which are similar to owning stock in a corporation. For pass through LLCs, the owners report company revenue as personal income.

Struyven and Philips believe that such double tax avoidance would “represent a substantial share of any politically feasible tax cut that Congress might pass,” even though Congressional Republicans have expressed confidence in a revenue neutral tax cut.

While these Goldman Sachs economists believe tax avoidance could amount to about $1 trillion in lost revenue, the Tax Policy Center estimates a grim $2.4 trillion deficit in the next decade.

According to CNN Money’s Jeanne Sahadi, “the Tax Policy Center estimated in November that Trump’s 15% proposal, coupled with a repeal of the corporate Alternative Minimum Tax, could reduce revenue by nearly $2.4 trillion in the first decade.”

This amounts to a full $240 billion in revenue losses each year, which could make it difficult to fund many social programs. For example, the government spent $304 billion in 2016 on income security programs, food stamps, child nutrition, and unemployment benefits.

However, it is important to note that nothing is final; Trump’s announcement does not yet explain how these tax reductions will be paid for. Plus, without votes from Democrats, it is likely that Trump’s proposed tax cuts would expire after 10 years.

With his first 100 days in office behind him, it’s clear that the Trump Administration plans to make good on one of his biggest campaign promises.