President Trump's promised special 15 percent tax rate for small business taxes would lead to about $1 trillion in tax avoidance over a decade, as corporations and high-earners would seek to game the tax code, economists for Goldman Sachs said Wednesday.
That tax avoidance would "represent a substantial share of any politically feasible tax cut that Congress might pass," bank economists Daan Struyven and Alec Phillips wrote in a note sent out Wednesday morning.
The problem relates to the special tax rate that the Trump outline envisions for businesses that file through the individual side of the tax code. Those businesses, including sole proprietorships, partnerships, LLCs, and S-Corporations, are sometimes called "pass-throughs."
Today, many of those businesses, including small businesses but also big ones, face the top individual income tax rate of 39.6 percent. The Trump administration justified the special 15 percent rate for small companies by saying it would boost small business growth.
If the special rate were created, according to Goldman Sachs, many corporations would seek to become pass-throughs in order to avoid the second layer of taxes that come with dividends taxes.
Furthermore, many would try to game the rules by claiming that their salaries are pass-through business income, thereby lowering their tax rate from the 35 percent top individual income tax rate.
Because those two types of avoidance would cut revenues by $1 trillion over 10 years, the Goldman Sachs economist speculate, Congress and the White House will ultimately aim for pass-through tax rates closer to the individual income tax rate.
Congressional Republicans, however, have expressed confidence in their ability to write rules into the tax reform bill to clamp down on that kind of gaming.