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The Trump tax scandal is an indictment towards the president – and the system


The problem isn't just that Donald Trump is deducting $ 70,000 in haircuts from his taxes or counting his family home in Westchester County as a business expense. It is also the system by which he can do it.

The New York Times blockbuster report on the president's long-awaited tax returns sparked outrage in some quarters about his tax burdens and business practices. The Times noted that Trump had paid no federal income tax at all for several years and only paid $ 750 in 2016 and 2017. It also showed enormous losses that Trump claims to have suffered in his shops. Many of these he later drastically reduced what he owed the government, an ongoing battle for $ 100 million with the IRS, and more than $ 400 million in debt soon to come due.

It's clear that President Trump isn't that hot on business and has made some bad bets. The Times investigation also suggests that the president has undertaken some legally questionable maneuvers regarding his taxes – it turns out that a man who lies about everything lies also about his finances, the public, and possibly the government . However, it is worth stepping back and examining the framework that made Trump possible: one with a myriad of tricks and loopholes that allow the rich not to pay their fair share of taxes, and one that the laws in force not enforced to catch bad actors.

"We essentially have a two-tier system in this country," said Natasha Sarin, an assistant professor of law at the University of Pennsylvania. “If you are rich and have access to the resources to figure out how to comply with tax laws or avoid existing liabilities entirely, then infrastructure is available to you and it is incredibly difficult for the IRS to go after you. "

Some of what Trump appears to have done is taken for granted in terms of tax tactics used by corporations and wealthy people. Some of this is not for a businessman and, perhaps more importantly, a president.

"If you are rich and have access to the resources to figure out how to comply with tax laws or completely avoid existing liabilities, then you have an infrastructure and this is incredibly difficult for the IRS to go after you"

“In the history of business people who are ruthless and very aggressive on tax issues, (Trump) is not literally unique. It's definitely at the end of the distribution, which is more aggressive and likely to be denied by the IRS, ”said Kimberly Clausing, an economist at Reed College. “There are other business people in that tail. What doesn't exist are presidents who clearly use their offices for financial gain. "

It's problematic on all fronts – even if some or much of it is legal, it feels a lot like cheating in a game that most people can't even play. The self-proclaimed ultra-wealthy President of the United States pays less taxes than millions of Americans.

Rich people have all sorts of ways to avoid taxes – and avoid enforcement

Much of what the Times investigation found is abnormal, or possibly even legal (more on that later), but some of it is. In America, when it comes to your taxes, it is often better to be rich than poor. The structure is more favorable to the rich and not well enforced for those who break the rules – who disproportionately tend to be the rich.

The US tax system is often preferred to higher-income individuals and companies, and has become increasingly so in recent years. Trump's $ 1.5 trillion tax cut bill, which went into effect in 2017, disproportionately benefited businesses and the rich, including the types of businesses the president is frequently involved with. also had 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 many loopholes that benefit white, wealthy Americans," said Dorothy Brown, a law professor at Emory University.

Real estate, in particular, is a tax-privileged industry, which means people like Trump get all sorts of discounts and perks. Robert Willens, a New York tax analyst and former executive director of Lehman Brothers, said in an email that he did not believe that the president's position was "very different from that of other real estate professionals" in a number of areas such as conducting. Business through “pass-through entities” and blurring the lines between what counts as business expenses and what is considered non-deductible personal expenses, which is sometimes not an easy distinction. (Lunch with a customer can be partly business, partly personal.)

"All in all, it's difficult to say that his situation at the end of the day is unprecedented or not often encountered by many real estate professionals, even though the number of people involved is considerable," he said.

Rich people and corporations also have the benefit of having the funds to spend on lawyers and accountants to help them find their way out of taxes.

"If you're a working person and as unscrupulous as Donald Trump, you don't have the same opportunities to avoid taxes as if you're a wealthy business owner," said Seth Hanlon, a senior fellow at the Center for American Progress. "Only people who are rich have expensive lawyers and accountants and own their businesses."

This is part of what leaves the country with a tax loophole – a difference between taxes levied by the IRS and taxes owed – that translates into significant dollars for 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 rich. Sarin and Summers estimate that underreporting for people who earn more than $ 10 million annually is five times higher than for people who make less than $ 200,000. Your rough estimate suggests that the top 1 percent makes up 70 percent of undrawn taxes.

“If you're a regular person earning a wage, your tax compliance is 99 percent. If you're a wealthy person who makes dividend and real estate income and runs a business, your compliance rate can be as low as 45 percent, ”Sarin said, citing estimates of the IRS tax gap. She and Summers believe restoring tax compliance efforts could generate $ 1 trillion over a decade.

The IRS, which is tasked with collecting and enforcing taxes, has come under pressure. The budget has been cut by around 20 percent since 2010. “Here you get the idea, rightly or wrongly, that a number of tax avoidances take place at the top. And it's difficult for the IRS to monitor, especially when their budget is suffering so badly, ”said Kyle Pomerleau, an American Enterprise Institute official.

Budget cuts have disproportionately hit the IRS financial agents, who are sophisticated and skilled enough to decipher a rich person's tax returns and figure out if they are evading taxes. Low-income Americans are tested just as or more likely than rich people. "The exam rates for EITC (Earned Income Tax Credit) recipients are the same as for the top 1 percent, which is insane," Hanlon said.

In the end, many things fall through the cracks. For example, it's not always easy to distinguish between personal and business expenses, especially with tax returns as complex as Trump's and the $ 70,000 hairstyling deductions made during The Apprentice. "They just don't have the resources to monitor every single return on small line items worth $ 70,000," Pomerleau said. "I know that phrase sounds ridiculous, but for multi-million dollar operations, $ 70,000 is not that much."

Donald Trump's tax avoidance seems particularly bad

It is true that wealthy people and businesses in America today can get away with a lot. However, many experts say that Trump seems particularly egregious, including in terms of what we know not only about his tax practices, but those of his family as well.

"That's not normal, even for wealthy people," said Hanlon.

For a man who's built his personal brand on being a business genius, Trump doesn't seem particularly good at business, or at least he wants the IRS to think he isn't. According to the Times report, which my colleague Andrew Prokop also wrote through Highlights of, Trump has claimed in tax returns that he lost tons of money on his business. Since 2000, he has reported losses of more than $ 300 million at his golf courses and losses of at least $ 55 million at his Washington, DC hotel, which 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 deter him from taking advantage of other losses to wipe out his tax bill.

"A typical billionaire's tax returns would not look like this," said Clausing. "Everyone is unlucky at times, but the picture that emerges from the Times story is one of a rather unsuccessful businessman."

There is a difference between tax avoidance, where people reduce tax liabilities to get more of their after-tax money, and tax evasion, where people intentionally fail to pay taxes or underpay. However, the line between what is a crime and what is not is not always well defined.

"The really rich do not save money on taxes by losing money and causing losses. The real rich in America have their wealth in assets that are taxed at a preferential rate. They create wealth through federal tax policies that make them less taxable." said Brown.

"Everyone is unlucky at times, but the picture that emerges … is one of a rather unsuccessful businessman."

It's also not clear whether Trump is honest in his tax returns about his finances. Former President's personal attorney Michael Cohen told Congress in 2019 that Trump inflated all of his wealth to get credit and then dumped it to cut his taxes. "I don't think these numbers are real. He lies about everything," said Brown.

There are only so many experts who can pull Trump's tax returns from the information published by the Times. The publication does not plan to publish the documents received in order to protect its sources, and even if it did, it would not, for example, tell us the President's assets.

Trump is likely losing quite a bit of money on his business, as his tax returns show, and is using tricks and loopholes in the tax system to cut his bill. He also appears to be falsifying details about the spending – for example, because he reportedly paid his daughter Ivanka Trump as an advisor to apply for a tax break.

The real kicker is that Trump is President of the United States. The Times reports that while he is at the White House, credit card receipts have started to surge in many of his homes as his fans and those who want to keep themselves in good hands do business with him. He has an unresolved $ 70 million audit conflict over a tax refund that he filed with an IRS he is currently overseeing. He also has enormous indebtedness which would create an obstacle for any other civil servant to carry out his duties.

"There is a tremendous amount of evidence that you act yourself and use the presidency yourself to find your way out," said Clausing.

Trump is the type the system helps

Republicans have advocated a relatively simple economic recipe for decades: they give money to the rich, and they invest and spend what benefits everyone else. But where is the evidence here? The Trump organization may have people and contracts with other companies, yes, but how many of them are ahead? Trump received so many benefits. He has repeatedly escaped the victim financially and otherwise and has been allowed to fail again and again.

Trump is an anomaly and not an example of how a trickle-down system works in theory and in reality. Amazon, for example, is doing gangbuster business during the pandemic, its CEO Jeff Bezos has earned billions and has paid little tax in recent years. Meanwhile, an additional $ 2 in frontline worker threats was paid in June. In addition to the systemic benefits that people like Trump enjoy, they also have the option to avoid the low tax enforcement and a framework to make it easier.

The President avoided paying taxes in the country for which he is responsible by losing and falsifying numbers. Right now, with so many Americans in dire straits, it's quite a contrast. We're two months into the $ 600 per month Extended Unemployment Insurance Plan under the CARES Act, and the message from Congressional Republicans to the millions of unemployed seems to be: Find out; You should have made better decisions. It is a message that people like the President don't get.

"It's depressing that this is the world we live in and that the President of the United States thinks it's okay that he pays less taxes than the poorest people in the country," said Sarin. "While the tax code allows him to act legally, which it definitely doesn't, this is a pretty amazing indictment against him and a tax system in dire need of real reform."

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