Andrew Harnik/AP Photo
Outside the Supreme Court, July 9, 2020, after the Court ruled that the Manhattan district attorney could obtain President Trump’s tax returns
The Great Recession was a time of hardship for millions of Americans experiencing lost jobs, stolen homes, and mass suffering. But when Donald Trump thinks back to this terrible time in American history, his eyes must light up. Government measures taken to speed recovery earned him hundreds of millions of dollars in tax benefits.
A good chunk of that is the subject of a fierce IRS audit right now. But you’re right to wonder why the American Recovery and Reinvestment Act (commonly known as the stimulus package), intended to pull the nation’s unemployed and underemployed back into the workforce, managed to bestow so much benefit on a failed businessman who played a tycoon on TV.
The answer goes beyond the Recovery Act. The U.S. tax code has been mangled in bipartisan fashion to serve the powerful. If members of Congress ever managed to separate themselves from their paymasters, they could easily fix this, and end the serial cheating of which Trump is only the most aggressive avatar. That ought to be the primary response to this bombshell.
Let’s look at those Recovery Act provisions. The first is known as the cancellation of debt income (CODI) rule. It was designed to encourage businesses to restructure debts without taking a tax hit. Canceled debt that often is a by-product of such restructuring is usually treated as income, but under the CODI rule, that income would be deferred for five years, and then spread out over the next five.
As disclosed by The New York Times, instead of declaring forgiven debt in 2009, Trump only began to declare it in increments of $28.2 million in 2014. It’s hard to calculate the ultimate savings from deferring $141 million of taxable income, especially since it overlapped with all the other deductions and credits that Trump took. But pushing taxation out for years and spreading out the hit does give a tangible benefit.
The second Recovery Act situation is more clear-cut. As a business owner—and business income is taking up a greater part of individual tax returns these days—Trump has made healthy use of “tax loss carryforward” rules to take personal losses from his businesses and apply them in future tax years, wiping out his liability. But you can also apply losses backward to cancel out prior tax payments and take refunds. Under the Recovery Act, businesses could apply “carryback” to losses incurred in the recession years of 2008 and 2009 over a longer period of time. Previously, those losses could only offset profits made in the previous two years; the Recovery Act expanded that to five.
This allowed Trump to apply some of his whopping $1.4 billion in losses from 2008 and 2009 back to the $56.9 million he paid in taxes in 2005 and 2006, as well as the $13.3 million from 2007. All told, he got a refund check for $72.9 million, which included interest. The only reason this triggered an audit that is still ongoing is that the source of the losses, Trump’s Atlantic City casinos, resulted from his giving up and abandoning the business entirely. But he didn’t abandon it: He retained 5 percent stock in the new casino company, which would limit his allowable loss to $3,000 per year, substantially less than $700 million.
In other words, Trump was just outrageously greedy enough to nearly blow the whole thing, a common theme of this look into his tax returns. If he were just modestly greedy, he would have gotten this refund without a problem.
This is the larger revelation. As Bob Kuttner explains today, Trump’s tax scams are just a more aggressive version of what real estate moguls do all the time: booking on-paper losses to wipe out tax liability, using debt as an instrument for tax avoidance, setting up hundreds of business entities to hide profits, and just aggressively moving around money and claiming deductions in the hope that they can outgun and outlast the resource-starved IRS.
Some of Trump’s tricks, like taking a historic-preservation tax break on the renovation of the Old Post Office into the Trump International Hotel in Washington, are limited to real estate developers. Others, like aggressive write-offs of hair styling and meals as business expenses, we often see in the entertainment industry (where Trump has had the bulk of his success).
But any rich person can use “conservation easements” to write off as a charitable deduction the failure to renovate the land around an estate in Upstate New York. Anyone can convert a property or asset into an investment, and write off things like property taxes as a business expense. Anyone with a business can deduct “consulting fees” when actually delivering money to a family member (Ivanka, in this case, who was part of the business in question at the time), evading gift taxes as well. They can deduct legal expenses, as Trump did for lawyers who were fighting the Robert Mueller inquiry.
The U.S. tax code has been mangled in bipartisan fashion to serve the powerful.
The idea that other rich politicians would be too noble to engage in such criminality defies reality. Mitt Romney managed to find himself with close to $102 million in his individual retirement account, despite annual contribution limits. That was a different rich-guy loophole that enabled him to assign a low value to shares in Bain Capital, avoiding the limits. Romney had a host of creative ways to lower tax liability. There’s literally a loophole called the Gingrich-Edwards loophole, allowing rich guys who set up an S Corporation to avoid Social Security and Medicare taxes, named after two of the presidential candidates (Newt and John, respectively) who used it. So did a guy named Joe Biden, and Trump likely did as well.
Usually, politicians react to being caught in this fashion—lame-duck congressman Eliot Engel using a home near Washington, outside his district, for a tax break, for example—by saying that they take “no special privileges.” But that’s the point. The tax code is completely skewed so wealthy and connected people can legally avoid tax. There’s a fine line between avoidance and evasion, and Trump was often on the wrong side of it. But that’s a difference in degree, not in kind. Trump was taking maximum advantage of a tax code that’s easy to take advantage of, if you’re rich.
That’s why some of the reactions from Democratic politicians to the tax return revelations have been so disappointing. Take the comments of Rep. Richard Neal (D-MA), who chairs the House Ways and Means Committee: “This reporting shines a stark light on the vastly different experience people with power and influence have when interacting with the Internal Revenue Service (IRS) than the average American taxpayer does.” Well, yes, and what might the head of the committee that writes the tax laws be able to do about that?
The top 1 percent avoids roughly $266 billion in taxes every year, about $166,000 per household. There’s simply a separate tax code that you only get access to with a golden key. Congress, in the hands of Democrats who every election cycle rail at the unfairness of this calamity, could change those laws, and lock that golden door.
Joe Biden’s tax proposal, actually, goes a pretty long way on this, adding payroll taxes on income over $400,000 a year, taxing capital gains and dividends as ordinary income on income over $1 million, rolling back the Trump tax cuts and capping itemized deductions for the rich, canceling the egregious step-up in basis that allows the dead to send massive untaxed assets to their heirs, and even reducing tax expenditures on commercial real estate like hotels.
The idea that other rich politicians would be too noble to engage in such criminality defies reality.
Beyond all that, we can cap or even ban tax loss carrybacks and carryforwards, which do little other than enrich businesses, in the hope that will trickle down to hiring (the CARES Act had similar provisions to the Recovery Act on carryback losses). We can limit business expenses and investment write-offs to actual business expenses and investments. And most important, we can hire as many IRS representatives as necessary to catch cheaters and pursue taxes legally owed.
But you have to want to do this. Every time someone suggests cleaning up the tax code, the few people who benefit from specific deductions plead: “Get rid of the other ones, but not MINE!” Every vow to close loopholes mysteriously goes nowhere, or in the process of that closure opens up an even bigger loophole. Every few years, we find out that some rich person didn’t pay any taxes and people get agitated, but nothing ever changes.
This change is available, but only as far as political will can take it. Don’t allow your representative in Congress to express shock and outrage at the Trump tax returns. Ask them what they are prepared to do about it.
