September 28, 2020; New York Times and The Nation
On Sunday, the New York Times published its exposé on the tax avoidance schemes of Donald Trump, which surprised—or ought to have surprised—almost no one. Perhaps most surprising is that between 2005 and 2007, Trump “paid substantial federal income taxes for the first time in his life: a total of $70.1 million.” Not very smart. In 11 of 18 years, of course, Trump paid no income tax. In 2016 and 2017, he paid a paltry $750 each year.
What can we learn from this? As Jeet Heer wisely points out in The Nation, “the real scandal is usually what is legal.”
Yes, Trump may have made illegal payments to consultants or been too aggressive in his deductions. In particular, there is an ongoing $72.9 million dispute over a 2010 income tax refund with the Internal Revenue Service (IRS) auditors, and the courts will decide. But as Heer rightly emphasizes, “much of what he’s done is standard operating procedure for the American rich and perfectly within the law.”
What does this standard operating procedure look like? Well, here are a few features:
• Business expense deductions: Trump was super-aggressive, but as the Times notes: “In allowing business expenses to be deducted, the IRS requires that they be ‘ordinary and necessary,’ a loosely defined standard often interpreted generously by business owners.”
For example, managing a “family business” with far-flung golf courses and hotels requires travel—and that travel, even in private airplanes, is a business expense. Or, famously, in Trump’s case, $70,000 for hair care is deductible due to its relation to his television appearances on The Apprentice. Trump’s Mar-a-Lago resort is also a source of millions in business deductions, all of which may be perfectly legal.
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• Consulting fees: In Trump’s case, between 2010 and 2018, Trump wrote off some $26 million in “consulting fees” as a business expense across nearly all of his projects. Trump seemed to like to write off about 20 percent of total project income in this way. As the Times explains, “Employers can deduct consulting fees as a business expense and also avoid the withholding taxes that apply to wages. To claim the deduction, the consulting arrangement must be an ‘ordinary and necessary’ part of running the business, with fees that are reasonable and market-based, according to the IRS. The recipient of the fees is still required to pay income tax.” While it is possible that Trump has used consultants to compensate family members in ways that go beyond what tax law allows, the Times notes that, “There is no indication that the IRS has questioned Mr. Trump’s practice of deducting millions of dollars in consulting fees.” Again, these deductions may all be perfectly legal.
• Conservation easements: Used properly, these can be highly useful for land preservation. As NPQ explained last January, “In exchange for forgoing the ability to cash in on the land’s market value, the landowner is entitled to deduct from her tax bill the difference between the appraised value of the land if sold on the market and the reduced financial value of the land that abides by the condition of the easement.” But conservation easements can be abused if appraisals are juiced up.
In 2015, Trump agreed to a deal with a land conservancy on an estate he owns in tony Westchester County, New York (whose famed residents include Bill and Hillary Clinton); he claimed a $21.1 million charitable tax deduction in exchange for agreeing not to develop most of the property. All told, of $130 million in charitable deductions that Trump claimed over the years, $119.3 million came in the form of conservation easements like the one in Westchester County. Again, this is all perfectly legal unless it can be shown that the appraisals are not reasonably related to the foregone development value.
The bottom line—while Trump faces all sorts of financial problems, including reportedly $421 million in personal debt that might yet sink him, to date he has shielded hundreds of millions from taxes.
The important point, though, is that Trump is not alone, as the New York Times’ editorial board today acknowledges.
Last year, reporting for CNBC, Robert Frank noted that total tax avoidance by the wealthiest one percent in the US could cost the feds $5 trillion over this decade, in part because the IRS, which once audited 12 percent of millionaires as recently as 2011, now audits only three percent of millionaires. (Those without wealth are easier to audit, you see.) Total tax avoidance for all taxpayers, according to a paper authored by former treasury secretary Larry Summers and finance law professor Natasha Sarin is likely to total $7.5 trillion between 2020 and 2029.
Needless to say, that $7.5 trillion could ameliorate many of the social problems that nonprofits tackle day in, day out. Money to provide rent relief and keep people in their homes? Check. Money to support $600 a week for those lacking work due to COVID-19? Check. Frankly, with that kind of cash, the US might also make a sizable dent on reparations, fund Medicare for All, forgive student debt, and more. And here, in the fact that we are doing none of these things, the real scandal appears.—Steve Dubb