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Trump Tax Scheme Proves Reform Need Crucial

October 7, 2018
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Trump Tax Scheme Proves Reform Need Crucial

Everyone is shocked to learn that President Trump amassed his fortune not by the sweat of his brow, but the old-fashioned way: choosing the right parents and dodging the Internal Revenue Service. That’s certainly the lesson of The New York Times expose last week reporting that Trump received more than $400 million in today’s dollars from his father’s business empire, some of it through what The Times characterized as criminal tax fraud. What to do with this information? Beyond all the Trump-specific takeaways — such as, duh, we need to see his tax returns — consider two much broader policy conclusions: ■ We need to adequately fund the IRS. ■ What’s scandalous here isn’t just what’s illegal. It’s also what is legal. If you wonder how Trump was able to duck tax authorities for so long, given the brazen acts documented by The Times, note that we have basically stopped prosecuting tax crimes and other white-collar offenses. This year, we are on track to notch the fewest tax-fraud prosecutions on record, about one-third the level of 30 years ago. There are lots of reasons tax cheats sleep easier than they used to. One is that Congress has repeatedly stripped the Internal Revenue Service of money and staff, though the IRS brings in much more money than it spends. Consequently, audit rates have plummeted, especially for corporations and the ultrawealthy. Since fiscal 2011, the audit rate for big corporations — those with at least $10 million in assets — has fallen by half; for households making at least $1 million in income, it’s down by two-thirds. To some extent, corporations and the rich have always managed to outgun the IRS — including during the 1990s, when the Trump family engaged in its dodgiest tax dodging. But these days, the agency brings a knife to a bazooka fight. As the tax code has become more complex and loophole-ridden, the return on aggressive and ambiguously legal tax-planning has grown. Well-heeled families and companies have invested accordingly. That brings me to the second issue. There’s a bunch of stuff the Trumps reportedly did that may not be illegal, but should be. When it comes to taxes , we need to work harder not only to enforce laws on the books, but also to make those laws fairer, clearer and less susceptible to exploitation. Real estate, in particular, has lots of loopholes and opportunities for legal tax avoidance. Relative to other taxpayers, real estate investors can easily use losses to reduce or wipe future tax bills — something Trump is also believed to have done, based on a leaked 1995 return declaring a $916 million loss. There have been periodic attempts to plug real-estate-specific tax loopholes. Trump personally testified before Congress in 1991 about his disgust for the removal of tax shelters for real estate, complaining that tax shelter is “a very bad-sounding word, even though it isn’t necessarily a bad thing.” As president, Trump has worked diligently to either preserve or multiply other tax breaks benefiting his family. For instance, The Times reported that the Trumps used — and likely abused — an estate-planning technique known as a “grantor-retained annuity trust” to help them duck hundreds of millions of dollars in gift taxes during the 1990s. This is, in fact, a tool that many rich people employ to pass on more wealth to their heirs tax-free, costing Uncle Sam tons of money for no justifiable economic reason. The Obama administration issued regulations to curb this popular tax-dodging tool. But almost a year ago, the Trump administration quietly withdrew those regulations. Of course, two months later, Trump signed an enormous tax overhaul that will save dynastic families such as his even more money by cutting income tax rates, doubling the exemption for the estate tax and, at the last minute, even adding a special new tax break for real estate investors. Ours is a tax code that largely operates on the honor system. If high-profile people don’t behave honorably — by cheating, by axing the cops who could catch the cheating and by rigging the tax code further in their favor so that cheating becomes a little less necessary — that entire honor system will deteriorate. No one, not even Leona Helmsley’s “little people,” wants to be the only sucker left still paying their tax bills honestly. CATHERINE RAMPELL writes for The Washington Post. crampell@washpost.com

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