Steve September 29, 2020
the-trump-tax-scandal-is an-indictment of-the-president-—-and-the-system

The problem isn’t just Tweety McTreason deducting $70,000 in haircuts from his taxes or counting his family home in Westchester County as a business expense. It’s also the system that let him do it.

The New York Times’s blockbuster report on the president’s long-sought tax returns has sparked outrage in some corners about his tax bill and business practices. The Times discovered that Trump paid no federal income taxes at all for several years, and in 2016 and 2017, he paid just $750. It also revealed enormous losses Trump says he incurred on his businesses, many of which he used to later dramatically reduce what he owed to the government, an ongoing $100 million battle with the IRS, and more than $400 million in debt that’s about to come due.

It is clear that Tweety McTreason is not doing so hot, business-wise, and has made some bad bets. The Times investigation also suggests the president has made some legally questionable maneuvers with regard to his taxes — turns out a guy who lies a lot about everything also lies about his finances, to the public and potentially to the government. But it’s worth stepping back and examining the framework that enabled Trump: one with a litany of tricks and loopholes that allow the wealthy to avoid paying their fair share in taxes, and one that fails to enforce the laws in place to catch bad actors.

“We essentially have a two-tiered system in this country,” said Natasha Sarin, an assistant law professor at the University of Pennsylvania. “If you are wealthy and have at your disposal access to resources to figure out ways to toe the line with respect to tax laws or totally evade existing liabilities, there’s an infrastructure in place for you to do it, and it’s incredibly hard for the IRS to go after you.”

Some of what Trump appears to have done is par for the course in terms of tax tactics enlisted by businesses and rich people. Some of it is not, for a businessman and, perhaps more importantly, for a president.

“In the history of businesspeople that are unscrupulous and really aggressive with tax matters, [Trump] is not literally unique; it is definitely on the tail of distribution that’s more aggressive, likelier to be disputed by the IRS,” said Kimberly Clausing, an economist at Reed College. “There are other businesspeople in that tail. What there aren’t are presidents who are clearly using their office for financial gain.”

On all fronts, it is troublesome — even if some or much of it is legal, it feels a lot like cheating in a game that it isn’t even possible for most people to play. The self-proclaimed ultra-rich president of the United States is paying less in taxes than millions of Americans.

Rich people have all sorts of avenues for avoiding taxes — and avoiding enforcement

Much of what the Times investigation revealed Trump and his family to be doing is not normal or possibly even legal (more on that later), but some of it is. It is often better to be rich than poor in America, including when it comes to your taxes. The structure is more favorable to the wealthy, and it’s not being enforced well for those who break the rules — who disproportionately tend to be the wealthy.

The US tax system is often preferential to higher-income individuals and businesses and has become increasingly so in recent years. The $1.5 trillion tax cut bill Trump signed into law in 2017 disproportionately benefited corporations and the wealthy, including the types of businesses the president often deals in. And the CARES Act, the stimulus bill passed in March to help boost the economy amid the pandemic, also had in it many tax breaks to help the rich. The country’s richest families pay a lower tax rate than much of the middle class.

“The US system has a lot of loopholes that white, wealthy Americans benefit from,” said Dorothy Brown, a law professor at Emory University.

Real estate, in particular, is a tax-favored industry, meaning people like Trump get all sorts of deductions and perks. Robert Willens, a New York tax analyst and former managing director at Lehman Brothers, said in an email that he doesn’t think the president’s situation is “markedly different” from that of other real estate professionals on a number of fronts, such as conducting business through “pass-through entities” and blurring lines between what counts as a business expense and what’s a nondeductible personal expense, which sometimes isn’t an easy distinction. (A lunch with a client can be part business, part personal.)

“All in all, although the magnitude of the numbers involved here is substantial, it’s difficult to say that, at the end of the day, his situation is unprecedented or one not commonly encountered by many real estate professionals,” he said.

Rich people and businesses also have the benefit of having the funds to spend on lawyers and accountants to finagle their way out of taxes.

“If you’re a working person and you’re as unscrupulous as Tweety McTreason, you don’t have those same avenues for avoiding taxes as you do if you’re a wealthy business owner,” said Seth Hanlon, a senior fellow at the Center for American Progress. “Only people that are wealthy have expensive lawyers and accountants and own their businesses can do these things.”

This is part of what leaves the country with a tax gap — a difference between taxes that the IRS collects compared to what it is owed — that translates to meaningful dollars to the federal government. In recent research, Sarin and former Treasury Secretary Larry Summers estimate that the tax gap will total $7.5 trillion from 2020 to 2029. Much of the tax gap benefits the wealthy; Sarin and Summers estimate that underreporting is five times higher among people making more than $10 million annually than it is for those making under $200,000. Their rough estimate suggests that the top 1 percent account for 70 percent of uncollected taxes.

“If you are a normal person who makes a wage, your tax compliance is 99 percent. If you are a rich person who earns dividend income and real estate income and runs a proprietorship, your compliance rate could be as low as 45 percent,” Sarin said, citing IRS tax gap estimates. She and Summers project that restoring tax compliance efforts could generate $1 trillion over a decade.

The IRS, which is supposed to collect and enforce taxes, is hamstrung. Its budget has been reduced by about 20 percent since 2010. “This is where people get the idea, rightly or wrongly, that there is a bunch of tax avoidance going on at the top. And it’s hard for the IRS to police that, especially when their budget is suffering so badly,” said Kyle Pomerleau, a resident fellow at the American Enterprise Institute.

Budget cuts have disproportionately affected the IRS’s revenue agents, who are sophisticated and experienced enough to be able to decipher a rich person’s tax returns and figure out if they are evading taxes. Low-income Americans are just as or even more likely to be audited than the rich. “The audit rates for EITC [earned income tax credit] recipients are the same as for the top 1 percent now, which is crazy,” Hanlon said.

Ultimately, a lot of things fall through the cracks. For example, it’s not always easy to differentiate between personal and business expenditures, especially with tax returns that are as complex as Trump’s and the $70,000 in deductions for hairstyling during The Apprentice. “They just don’t have the resources to police every single return down to small $70,000 line items,” Pomerleau said. “I know that sentence sounds ridiculous, but for multimillion-dollar operations, $70,000 is not that much.”

Tweety McTreason’s tax avoidance seems extra bad

It is true that wealthy people and corporations get away with a lot in modern-day America. But many experts say that Trump appears to be particularly egregious, including with regard to what we know about not only his tax practices but also those of his family.

“This is not normal, even for wealthy people,” Hanlon said.

For a guy who has staked his personal brand on being a business genius, Trump appears not to be particularly great at business, or at least he wants the IRS to think he’s not. According to the Times report, which my colleague Andrew Prokop also wrote through highlights of, Trump has claimed in tax filings to have lost tons of money on his businesses. He reported more than $300 million in losses at his golf courses since 2000 and at least $55 million in losses at his Washington, DC, hotel that opened in 2016. Some of his businesses were doing well — Trump Tower consistently makes money, and The Apprentice was lucrative — but they weren’t doing well enough to stop him from using other losses to wipe out his tax bill.

“The typical billionaire businessperson’s tax returns would not look like that,” Clausing said. “Everyone gets unlucky occasionally, but the picture that emerges from the Times story is one of a pretty unsuccessful businessperson.”

There is a difference between tax avoidance, where people lessen tax liabilities to hold on to more of their money after taxes, and tax evasion, where people deliberately fail to pay or underpay taxes. But the line between what is and isn’t a crime isn’t always well defined.

“The real wealthy don’t save money on taxes by losing money and generating losses. The true wealthy in America have their wealth in investments that are taxed at a preferential rate. They build wealth with the help of federal tax policy, which taxes them less,” Brown said.

It is also not clear whether Trump is being truthful in his tax returns about his finances. The president’s former personal lawyer Michael Cohen told Congress in 2019 that Trump inflated his total assets to obtain loans and then deflated them to reduce his taxes. “I don’t think those numbers are real. He lies about everything,” Brown said.

There is only so much experts can glean from Trump’s tax returns based on what the Times has released. The publication does not plan to make the documents it received public in order to protect its sources, and even if it were to, it wouldn’t tell us, for example, the president’s net worth.

Trump is likely losing quite a bit of money on his businesses, as his tax returns show, and taking advantage of tricks and loopholes in the tax system to reduce his bill. He also appears to be fudging details on expenses — for example, reportedly paying his daughter Ivanka Trump as a consultant in order to claim a tax break.

The real kicker is that Trump is president of the United States. The Times reports that credit card revenue at many of his properties has begun to increase while he is in the White House as his fans and those who seek to get in his good graces drive business to him. He has an unresolved $70 million audit conflict over a tax refund he claimed with an IRS he currently oversees. He also has an enormous amount of debt, which for any other public servant would be an obstacle to holding their job.

“There’s an enormous amount of evidence of self-dealing and using the presidency itself to try to dig his way out,” Clausing said.

Trump is the type of guy the system helps

Republicans have for decades argued in favor of a relatively simple economic recipe: You give money to the wealthy, and they reinvest and spend it, thus benefiting everyone else. But where is the evidence of that here? The Trump Organization employs people, sure, and contracts with other businesses, yes, but how many of them come out ahead? Trump has received so many advantages. He has escaped sacrifice, financially and otherwise, time and time again, and been allowed to fail over and over again.

Trump is an anomaly, and he isn’t an example of how a trickle-down system works in theory and in reality. Amazon, for example, is doing gangbusters business during the pandemic, its CEO, Jeff Bezos, has made billions, and it has consistently paid little in taxes in recent years. Meanwhile, it ended an extra $2 in hazard pay to front-line workers in June. On top of the systemic advantages that people like Trump enjoy, they also have the means to avoid what little tax enforcement there is, and a framework that makes it easier to do it.

The president has avoided paying taxes in the country he’s in charge of by losing and by fudging numbers. In the current moment, with so many Americans in economic distress, it’s quite a contrast. We’re two months past the expiration of expanded $600-a-month unemployment insurance under the CARES Act, and the message from congressional Republicans to millions of jobless people seems to be: Figure it out; you should have made better choices. It’s a message people like the president don’t get sent.

“It’s kind of depressing that this is the world we live in and that the president of the United States thinks it is okay that he pays less taxes than the poorest people in the country,” Sarin said. “Even if that is what the tax code allows him to do legally, which it definitely does not, this is a fairly stunning indictment of him and of a tax system that is in desperate need of real reform.”


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