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Trump’s Tax Returns Show Why We Need to Fund Tax Enforcement

Oct. 8, 2020, 8:01 AM

The revelations from President Donald Trump’s tax returns reported by the New York Times give new definition to the phrase “shocking but not surprising.”

Shockingly, the president of the United States, with a supposed net worth of $2.7 billion, paid a sum total of $750 in income taxes in his first year in office. That’s less than a single person working full-time for $9 an hour, or $18,000 annually, would have paid. And Trump reportedly paid nothing at all in most prior years.

But given what we already knew about Trump, it’s hard to say the Times report was all that surprising.

The numerous ways Trump avoided taxes stretch the boundaries of what the tax code allows, and quite possibly cross the line into civil or criminal tax fraud. These include: writing off his hairstyling and other personal items as business expenses, claiming inflated charitable deductions for so-called “conservation easements,” and claiming a $73 million loss by claiming he’d abandoned a business interest that he had actually retained a stake in.

Trump tweets about “LAW & ORDER!,” but for decades, his attitude toward tax authorities seems to have been “catch me if you can.” The suspiciously large “consulting fees” he paid Ivanka Trump resemble the kinds of dodgy strategies the Trump family used to avoid some $500 million of taxes on the estate of family patriarch Frederick Trump, according to earlier reporting by the Times.

By claiming a highly questionable $916 million loss deduction in 1995, Trump also seemingly wiped out his entire tax bill for the entire 1990s and early 2000s.

He also used his tax-exempt charitable foundation as a personal and political piggy bank, until New York state authorities finally shut it down.

The fact that a person like Trump has reportedly flouted the tax law for so long with hardly any consequences is an indictment of the system as a whole.

Cynics may question: Do most Americans really care that people like Trump can get away with paying so little in taxes? Yes, actually.

According to the Pew Research Center, Americans’ top frustration with the tax system is not that they pay too much in taxes, or that taxes are too complicated—it’s that some wealthy people and corporations don’t pay their fair share. The vast majority of Americans believe that paying taxes is an important ethical obligation. The sense that the wealthy and powerful are getting away with paying less than what they owe undermines confidence in a system that relies on voluntary compliance. It adds to the general sense that the economic system is rigged.

Fixing this broken system must be a major priority of the next Congress and administration, with a focus on several goals.

Fund tax enforcement. The most obvious takeaway from the Trump tax saga is that the IRS is overmatched in policing the very wealthy. The unscrupulous among them reason that they have little to fear from taking very aggressive positions. Over the last decade, the budget for the IRS’s enforcement functions have fallen by roughly a third in real terms, with the agency losing an even greater share of its trained enforcement personnel. The IRS has been so decimated that it completely failed to pursue hundreds of thousands of high-income people who filed incomplete tax returns or no tax return at all. Criminal investigations and prosecutions have become more rare. And when audited, wealthy taxpayers can fight the IRS at every step, hoping the agency will agree to a friendly settlement in order to avoid a costly war of attrition.

The IRS needs to be rebuilt, with massive infusions of funding for enforcement and technology. These investments will more than pay for themselves. Every dollar of enforcement resources directly generates several dollars in revenue from audits and collections—with even greater indirect effects on voluntary compliance.

Focus on where the problems are. High-income taxpayers are responsible for an outsized share of the “tax gap”—which by the last official count was $381 billion per year. Yet audit rates for millionaires have plummeted, while audit rates for ordinary taxpayers have declined more modestly. The IRS now audits low-income workers who claim the Earned Income Tax Credit at about the same rate as the highest-income 1%. Shockingly, IRS audit rates are highest in low-income, majority-Black counties. For reasons of both revenue collection and fairness, IRS must turn its enforcement priorities right-side-up and address racial inequities.

Address legal loopholes. It appears that the main reasons Trump paid so little tax in recent years are that he is claiming deductions he is not entitled to, and that he has genuine losses from bad investments. But even without those factors, wealthy real estate moguls like Trump have plenty of special tax breaks to exploit. Real estate owners can claim generous depreciation deductions while also deducting interest. They can roll over gains in several ways, including like-kind exchanges and the newest loophole—opportunity zones. The “step up in basis” loophole allows gains to be permanently erased for tax purposes if an asset is held for one’s lifetime. And even when investors realize gains, they do so at preferential capital gains rates. Business owners like Trump are now also able to pay 20% less on much of their income through the new passthrough deduction.

The irony is that Trump promised to fix the tax code and eliminate special breaks for people like him—but then only made it worse with the law he signed in 2017. Overhauling that law will now be the starting point for genuine tax reform.

Hold the president accountable. Finally, the Trump tax saga also represents a breakdown of safeguards that are supposed to ensure democratic accountability. The fact that the president has more than $400 million of debt payments coming due and, as we have learned, seems to be reliant on business from foreign governments, lobbying groups, and others to keep his empire above water is deeply concerning—and exactly why presidential candidates had been expected to release their tax returns. That expectation should be made into a law, like the legislation the House of Representatives has passed. The Trump administration also flouted the law requiring it to furnish tax returns to Congress upon request, and courts have failed to enforce Congress’s subpoena. Congress will need to bolster its oversight tools so that newspaper leaks are not the only way American people get needed information.

This column doesn’t necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.

Author Information

Seth Hanlon is a senior fellow at American Progress, where he focuses on federal tax and budget policy. Prior to rejoining American Progress, he served as special assistant to the president for economic policy at the White House National Economic Council, where he coordinated the Obama administration’s tax policy. He has also served as senior tax counsel for the House Budget Committee Democratic staff under former ranking member Rep. Chris Van Hollen (D-Md.) and as tax counsel for Sen. Debbie Stabenow (D-Mich.), among other Capitol Hill roles. He was the Director of Fiscal Reform during a prior stint at American Progress and an associate attorney at Caplin & Drysdale, Chartered.