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This piece was originally published in The Guardian.
Donald Trump’s tax returns are a stark illustration of what’s broken with the US tax system: the tax code has one set of rules for the richest 0.1% and another for everyone else.
For the vast majority of taxpayers, the rules are straightforward. If you earn a paycheck from an employer, odds are the majority of your taxes are already withheld, and your earnings are reported to the government. There’s little room for manipulation.
But the wealthier you are, the more of your money likely comes from non-wage income, business ownership interests and other complex assets – and the easier it is to game the system.
Many of these income sources are already taxed at lower rates than regular wages. But the richest 0.1% also hire “wealth defense industry” professionals – tax lawyers, accountants, wealth planners – who mine the tax code for loopholes and shift assets to the shadows. As a result, the effective tax rate paid by the wealthiest US families fell below 25% over the last decade.
That’s less than most low- and middle-income people pay already. But even in this supremely privileged club, Trump’s tax avoidance stands out. With a series of tax bills ranging from $0 to just $750 of his alleged billions, Trump paid virtually 0% most years.
How? In part, Trump aggressively used business tax deductions and charitable donations.
For instance, Trump “carried forward” losses from money-losing businesses from one year to the next, allowing him to claim the loss in multiple years. As a result, he paid no taxes in 10 out of 15 years between 2000 and 2015. On top of this, he deducted lavish lifestyle perks like private jets, luxury residences and $70,000 in hair styling as “business expenses.”
Trump also paid tax-deductible salaries and consulting fees to his children, a form of passing on wealth that avoids estate and gift taxes. In fact, it’s the same technique Trump’s father used decades earlier to transfer $413m to Donald Trump himself.
Trump even found a way to deploy charitable tax deductions in a self-interested manner. By donating development rights surrounding his personal mansion in Westchester county, New York to a land conservancy, Trump created a taxpayer-subsidized buffer zone around his private property while collecting a $21.1m charity tax break.
Trump donated conservation easements in three other cases, including land around the Trump National Golf Club in Los Angeles. These transactions accounted for the vast majority of his charity deductions over these years. The attorney general of New York is investigating several of these transactions that may have deployed inflated appraisals.
Abuses like these make it all too clear: lawmakers need to restore the integrity of the tax code, with a focus on the manipulations of top 0.1 percenters like Trump.
For example, there should be a time limit and financial cap on how much taxpayers should subsidize failing business ventures. Limiting the carry-forward of legitimate losses to six years is a reasonable period for viable enterprises. Similarly, there should be stricter scrutiny of deductions for excessive personal luxury expenditures as qualified business expenses – $70,000 on haircuts shouldn’t make the cut.
More fundamentally, Congress should eliminate the preferential treatment of income from capital over income from wages. There’s no reason stock gains, for example, should be taxed at a lower rate than workers’ paychecks. An easy first step would be to levy a 10% surtax on all income over $2m, whether from wages or investments. This would raise $635bn over a decade from those with the greatest capacity to pay.
Congress should also modernize rules governing charitable giving to eliminate the provisions for the self-dealing so well chronicled in Trump’s donation of conservation easements that enhance his personal property.
Congress should boost the IRS’s enforcement resources to close the estimated $574bn gap in lost annual revenue from tax evasion and noncompliance. Enforcement should focus on the richest 1%, who are responsible for roughly 70% of tax underreporting, according to one study.
Investments in new technology and enforcement could bring in $24 in revenue for every $1 invested. If the laser focus is on the richest 0.1% of households and cracking down on many of the devices deployed by Trump, the potential benefits could be even greater.
Then, Congress could turn its attention to further restoring progressivity to the federal tax system, legislating an annual wealth tax, strengthening the estate tax, and equalizing capital gains and income tax rates.
The integrity of the US tax system has hit a new low, with the revelations that a sitting president is tax-avoider-in-chief. The Trump tax playbook should serve as a catalyst for reform.