How to Make Trump and the Wealthy Pay Their Taxes

Since a Democratic-controlled House Ways and Means Committee released five years of Donald Trump’s tax returns, the Republicans’ farcical struggle to elect a new Speaker of the House has distracted attention from two urgent questions that the contents of the returns raised: How can we remodel the U.S. tax system to prevent Trump and other wealthy tax cheats from continuing to make a mockery of it? And, going beyond the individual case, egregious as it is, how can we use what we have learned to make the tax system fairer?

After reviewing years of Trump’s returns and speaking with independent tax experts, I am convinced that there are three imperatives. First, we need to strengthen the Internal Revenue Service so that it has the capacity to hold accountable serial tax avoiders like Trump and to deter would-be imitators. Second, we must eliminate loopholes in the tax code that serve no economic purpose beyond sheltering the riches of the financial élite while depriving the federal government of much-needed revenue that would aid other Americans. (This shortfall amounts to upward of four hundred billion dollars a year, according to some estimates.) Third, we have to introduce broader changes to the tax code for an economic era where the rich accumulate vast amounts of untaxed wealth, and where inequality has reached record levels.

Trump’s returns, which cover the tax years 2015 through 2020 and run to thousands of pages, have added new details to a story that is, by now, well known. For more than three decades, he has flaunted his wealth while paying very little federal income tax, and in many years no tax at all. In 2017, his first year in the White House, Trump and his wife Melania paid seven hundred and fifty dollars in federal income tax, far less than the average school teacher. In 2020, Trump’s last year in office, he and his wife paid no federal income tax.

How did he manage this? One thing that kept down Trump’s tax liabilities was the fact that, while he’s a natural at self-promotion and marketing, he’s a bad businessman. The returns confirm that some of his companies, particularly his chain of upscale golf resorts, suffer hefty operating losses year after year, and this offsets income from his licensing deals and other more profitable enterprises. To cite a recent example: in 2020, two golf courses that Trump owns in Scotland reported respective losses of $9.6 million and $2.6 million.

But poor management is only part of the story. Trump also takes hefty deductions for depreciation of his real-estate assets, a tactic that many other property developers also exploit. And he doesn’t stop there. The returns show him claiming dubious charitable deductions and reporting business expenses that, in some cases, are suspiciously similar to the revenues these businesses took in, raising the question of whether these were genuine business expenses. For example, in 2016, one Trump entity, DT Endeavor I LLC (an aviation company), reported gross income of $680,886 and expenses that also somehow totalled exactly $680,886—a coincidence noted by the staff of the Joint Committee on Taxation in its report on the returns.

Did the I.R.S. ask to see receipts for these expenses? We don’t know. We do know that, when the agency finally got around to auditing Trump’s returns in 2019, in all their length and complexity, it initially assigned the task to a single agent. We also know that, between 2010 and 2020, Congress reduced the I.R.S.’s budget by more than twenty per cent in inflation-adjusted terms, the number of people in the agency’s enforcement division fell by almost a third, and the rate at which rich taxpayers were audited dropped by more than two-thirds. “Rich, aggressive tax filers like Trump are playing an audit lottery, and they know they have little chance of getting caught,” Steven Rosenthal, a veteran tax lawyer who is now a senior fellow at the Urban-Brookings Tax Policy Center, told me. “The U.S. tax system relies on filers providing good-faith estimates of their taxable income. When you have bad-faith actors, that puts more pressure on the system. The I.R.S. needs more technical support, more lawyers to litigate cases, and more agents who understand complicated tax returns.”

As part of last year’s Inflation Reduction Act, Congress took an important step toward reversing its past cuts, by allocating an additional eighty billion dollars to the I.R.S. About half of this sum will go to enforcement, particularly investigations of large corporations and high-net-worth individuals, like Trump. But House G.O.P. members, some of whom want to abolish the I.R.S. entirely, have already indicated their desire to rescind the additional funding. With Democrats controlling the Senate, that proposal has no chance of becoming law, but the threat from Republicans won’t end there. “When the debt ceiling comes up, they could hold up the entire country to reverse the eighty-billion-dollar increase,” Rosenthal warned.

The first policy priority, then, is to insure that the additional resources for the I.R.S. remain in place, and that they get used wisely. But even a properly funded tax agency wouldn’t be able to prevent unscrupulous filers from exploiting every loophole in the tax code to the absolute maximum. Experts say the biggest reason that Trump has been able to avoid paying taxes for so long is three huge single-year losses, which he reported in the distant past: $916 million in 1995, nearly $700 million in 2009, and $200 million in 2010. Under the existing tax law, he has been able to carry these losses forward (and backward) to offset his tax liabilities in other, more profitable, years.

Was this legitimate? At least in the earlier case, the I.R.S. appears to have accepted Trump’s huge loss carry-overs, or at least did not punish him. For the 2009 tax year and some subsequent ones, the agency audited Trump’s returns, and it’s not clear if these audits have been resolved. “Congress should investigate Trump’s huge operating losses and deductions,” Frank Clemente, the director of Americans for Tax Fairness, a Washington-based advocacy group, told me. “Is this something unique to Trump, or is this a loophole that others exploit, too, and which needs eliminating? Congress needs to find out. It shouldn’t be left to the I.R.S. to fight this out in court.”

That brings us to the third imperative that I mentioned up top. If we want a better and more equitable tax system, we need to update the tax code for an economy that creates huge agglomerations of wealth, which a large industry of accountants and tax lawyers seeks to keep from the taxman’s grasp. Of course, progressive tax reform isn’t easy. If it were, abominations like the carried-interest deduction for managers of hedge funds and private-equity funds, which allows these people to shelter vast earnings, would have been expunged long ago. Still, there are a number of proposals already on the table that are worth pursuing, in whole or part.

Reviving the effort to make wealth-fund managers pay their fair share would be a start. Another idea that shouldn’t be controversial is clamping down on the types of pass-through entities and private partnerships that feature prominently in Trump’s returns, and which can be used to avoid taxes and make it difficult for outsiders, including the I.R.S, to penetrate such financial thickets. The Democratic senator Ron Wyden has proposed draft legislation that limits the flexibility that these partnerships enjoy, and which would make it easier for the I.R.S to audit them effectively. That, surely, would be in the public interest.

On a grander scale, President Biden last year proposed a “Billionaire Minimum Income Tax,” which would be tantamount to an annual wealth tax on some of the richest U.S. households. In addition to paying income tax on the income that they declare, households with a net worth of more than a hundred million dollars would be required to pay an annual levy on their unrealized capital gains. Although Biden’s proposal is less ambitious than the wealth-tax plans that Bernie Sanders and Elizabeth Warren unveiled during the 2020 Democratic Primary, its enactment would represent a landmark in U.S. tax policy.

To be sure, with the Republicans controlling the House for the next two years, none of these proposals are likely to get far. But, in the spirit of trying to extract something positive from the Trump experience, it’s well worth developing them further and trying to build public support for them. And, while that’s happening, let’s not forget to strengthen the I.R.S. and protect it from renewed G.O.P. attacks. ♦

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