By Dan McLaughlin
Friday, October 02, 2020
The story of Donald Trump’s tax returns is, as I noted
previously, unlikely to have a big political effect, and is already
overshadowed by much of the other talk at Tuesday’s debate. It is, however,
worth asking what exactly the criticism is about. The irony is that Trump was a
beneficiary of the kind of tax complexity that Democrats tend to prefer, and
specifically a beneficiary of an Obama tax policy that Trump repealed.
The question might well be asked about why we look into any
politician’s taxes. Partly, of course, it’s just an opportunity to poke fun at
Trump, which is fair enough game in politics, but not a reasoned argument of
any kind. Partly, it’s a complaint that Trump has taken every available
opportunity within the law to reduce his tax bill, which is not just in
character; it’s also in the American tradition of paying as few taxes as the
law will allow.
One legitimate reason to examine a candidate’s taxes is
to look for conflicts of interests. While it was already well known from
Trump’s current financial-disclosure forms and other reports that he has
interests in Trump hotels in some controversial spots abroad, his
pre-presidential tax returns do shed additional light on his properties in
Turkey and the Philippines. As Tim Carney notes, both of those properties are
glaring conflicts of interest that put Trump assets at the mercy of nasty
foreign despots.
The usual angle, though, that gets raised in these
arguments and is raised now is some combination of hypocrisy and
self-interestedness. “See,” the argument goes, “Trump just wants to cut taxes
for the rich because he is a rich guy who uses tax loopholes to avoid paying
taxes.” But here’s the problem: It’s not Republicans or conservatives who want
a tax code riddled with exploitable ways to let people out of paying generally
applicable tax rates. In fact, when you look closer, Trump has sometimes
benefited significantly from Democratic tax policy, or from policies of the
kind that Democrats have pushed for in recent years.
Much of Trump’s income comes from his businesses, and he
pays taxes on those businesses only when they make money. Personal and business
income taxes in America are not gross-revenue taxes or wealth taxes; they are income
taxes. For a business, that means profits. If the business loses money, after
considering all its expenses, it owes no taxes. In theory, our system could
work differently — we could have a gross-receipts tax or a value-added tax —
but there are serious reasons why it doesn’t. For example, taxing money-losing
businesses would put a burden on new small businesses and drive more businesses
to close their doors during down times.
More controversial is what to do about businesses that
make money some years, and lose a lot more money in others. The tax code allows
losses to be spread out over multiple years, wiping out tax liability for
profitable years. Naturally, this is not something a typical wage-earner can do
with their taxes, although it can be helpful if you own a small business or a
family farm. This is not unique to the United States; most
European countries, even ones with fairly socialist economies, also allow
losses to be “carried forward” for some period of years. As in the U.S., there
may be varied and complicated restrictions on how much tax reduction one gets
out of those losses. According to the Times report, much of Trump’s tax
avoidance in the period between 1995 and 2004 arose from carrying forward his
large losses in the 1990s.
An even more aggressive use of losses is “carrying back”:
allowing a business that loses money to offset that against prior years’
profits and claim a retroactive tax refund. The economic incentives involved in
allowing businesses to carry losses back are more dubious. If a business loses
money and hopes to make it back in the future, carry-forward provisions give
the owner an incentive to stay in operation rather than declare bankruptcy or
start over with a new venture. That is good for workers, customers, suppliers,
etc. By contrast, carry-back not only offers no long-term incentives, it
encourages profitable business to take larger risks, knowing that they can get
a bailout down the road in the form of a tax refund.
These rules have changed over the years. In 2009, the
Obama-Biden stimulus bill changed the rules to allow carrying back losses four
years into the past, rather than two. The stimulus was written by Democrats and
passed essentially on party-line votes. As
Kyle Smith has discussed, the Times story admits that Trump claimed
a $73 million windfall refund of past taxes from Obama’s expansion of
carry-back rules:
Mr. Trump had paid no income taxes
in 2008. But the change meant that when he filed his taxes for 2009, he could
seek a refund of not just the $13.3 million he had paid in 2007, but also the
combined $56.9 million paid in 2005 and 2006, when “The Apprentice” created
what was likely the biggest income tax bite of his life.
That $73 million (including interest) refund is still
being contested eleven years later. The bipartisan Congressional Joint
Committee on Taxation has to offer a recommended opinion on refunds that large,
and it has dragged its feet. The committee’s opinion is advisory, because the Constitution
could not empower a committee of parts of both houses of Congress to carry out
an executive or judicial function, but the process becomes more problematic
when the taxpayer is the president and the committee simply doesn’t act.
Still, the entire windfall was the direct result of
Democrats giving a big handout. It is hard to blame Trump, or Republicans, for
that policy decision. In fact, the 2017 Tax Cuts and Jobs Act passed by the
Republican Congress and signed by Trump eliminated carry-back provisions.
(On the other hand, it eliminated the already-generous 20-year limit on how far
losses could be carried forward). But the bipartisan CARES Act passed this year
reversed course again, allowing a five-year carry-back not only for losses in
2020 but also in 2018 and 2019.
On the broader point, if you dislike the spectacle of
some very rich people and businesses paying a lot less in taxes than you’d
expect from their tax rates, the solution should be a flatter, simpler tax
code. And that is the last thing that Trump’s Democratic critics want.
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