President Donald Trump has made the case for sweeping tax reform.
A bombshell New York Times investigation of nearly two decades of his tax returns showed that he paid zero federal income taxes in 10 of the years from 2000 to 2015, and just $750 in both 2016, the year of his first presidential campaign, and 2017, the first year he spent in the White House. Millions of Americans counted among the working poor, including some with earnings putting them just above the poverty line, paid more in annual federal income taxes.
Some of what Trump and his tax preparers did to zero out his tax liability might have been illegal. (The Times did not post the returns themselves, just descriptions of their contents.) The Manhattan district attorney, locked in a protracted battle with the president, has indicated that he plans to investigate him for tax fraud; Michael Cohen, Trump’s former personal lawyer, described what seemed like extensive fraud in his testimony to Congress last year. But much of what Trump did seems to have been aboveboard, even common among family businesses. Using aggressive asset-depreciation schedules, carrying forward losses: This kind of malarkey, as Joe Biden might say, is written into the code.
Trump tweeted, in response to the Times story, that he has “paid many millions of dollars in taxes but was entitled, like everyone else, to depreciation [and] tax credits.” He is right that the issue is not so much what he did as what he was allowed to do. The tax code has long been too easy to game, too complicated, too baroque, and too lightly enforced, allowing individuals like Trump to get away with paying far less than their fair share.
Hiding or sheltering income from taxation is a big problem for the American government. The Internal Revenue Service estimates that taxpayers illegally evade roughly 16 percent of overall taxes, accounting for about half a trillion dollars a year in lost revenue for Uncle Sam. (That missing revenue would have covered most of the country’s budget deficit in recent years.) Tax avoidance, using legal strategies to reduce a company or household’s tax liability, costs the country something like $200 billion a year more. These gaps amplify the country’s deficit and shift the burden of taxation away from rich households and rich businesses onto middle-class families and smaller firms.
Eliminating such gaps means simplifying the tax code: getting rid of deductions, credits, loopholes, and other provisions that allow big businesses and rich families to hide their income from taxation or to pass it on to their heirs tax-free. Trump, for instance, slashed his taxable income by $26 million by “treating a family member as a consultant, and then deducting the fee as a cost of doing business,” the Times report found, and he wrote off tens of thousands of dollars of spending on hairstyling. Getting rid of this kind of Swiss cheese is an easy way to raise more money while also making the tax code fairer.
Trump’s returns demonstrate how complexity in the tax code is regressive: something for rich people to research and exploit, and for poor people to be unaware of and miss out on. One in five people eligible for the lucrative earned income tax credit, for instance, does not receive it. “Credit eligibility depends on marital status at the end of the year, earnings, income, and citizenship status. There are additional tests of relationship and residency for people with children. Eligibility can vary from year to year,” the Tax Policy Center explains. People like Trump take advantage of this kind of complexity. Single parents juggling multiple jobs, teenagers just entering the workforce, the elderly and disabled, do not. Making the code simpler would benefit all Americans in this way too.
Trump’s tax returns also make a strong case for levies on wealth. Possibly legal tax maneuvering zeroed out much or all of Trump’s income, year after year. But he still benefited from owning a valuable real-estate and branding empire, allowing him to throw lavish parties, use private jets, and maintain multiple homes. Wealth taxes would ensure that rich Americans with low paper earnings, like Trump, pay their fair share while also reducing the incentive to shelter or hide earnings in the first place. A wealth tax might be a straightforward levy on an individual’s net worth, as suggested by Emmanuel Saez and Gabriel Zucman of UC Berkeley. It could also come in the form of financial transaction taxes, stronger taxes on real-estate trades, or hefty inheritance taxes, which might be easier to administer.
Finally, Trump’s taxes make the case for fully funding and expanding the IRS. The agency’s overall budget has declined by more than 20 percent since 2010. Its enforcement budget has declined by 24 percent. Its audit rate for millionaires has fallen by 61 percent, and its overall audit rate by half. Lower-income households eligible for the EITC now have the same audit rate as the top 1 percent of filers, though rich families underpay at five times the rate of lower-income and middle-class families.
This lack of enforcement costs the government billions. It overburdens honest tax filers. It benefits the rich at the expense of the poor. It also lets criminals get off scot-free. As the Organization for Economic Cooperation and Development and the World Bank note, tax crime and corruption are “intrinsically linked,” and finding tax cheats often means uncovering other criminal behavior. Stronger enforcement would more than pay for itself.
In paying so little, and doing so at least in part legally, Trump makes the case for all of these changes: The code needs to be simple enough for lower-income families to understand and benefit from, and simple enough to make high-income families comply and pay up.