How Trump profits from, and protects, a rigged tax system
During Donald Trump’s 2016 presidential campaign, he vociferously complained that the tax system, indeed the entire economy, was rigged. Turns out, he’s right: The tax system is rigged. However, what Trump repeatedly failed to point out, and what is confirmed by a revelatory new New York Times report showing his huge losses and paltry tax payments over a decade, is that he and his family were and are benefactors of this system.
Consider some salient facts: Income based on labor, which is how the vast majority of working stiffs make a living, bears both payroll and income tax. The combined tax rate is often in excess of 50 percent. By way of stark contrast, the tax on capital income is taxed only once and at tax rates less than half imposed on labor, often 23.8 percent.
Need more evidence that the system is rigged? Those in the real estate industry are accorded huge depreciation write-offs, can defer gains and, in some cases like Trump’s, can eliminate their tax liability entirely.
Congressional rigging of the tax system did not come about by accident. Lobbyists have fought long and hard to secure tax breaks for their clientele, who are mostly those are the upper socioeconomic echelon. Beyond lobbyists, members of Congress themselves often hail from the wealthy and ultra-wealthy strata, who have apparently found it hard to cast their financial self-interest aside.
The tax code has thus been formulated in a manner which propels one percenters on the backs of those who those who are not.
Trump is a textbook example of this point. For decades, he has been able to use the tax system to pay little or no tax. How is this possible, you ask?
Marvel at some the ploys Trump and team of tax advisers have historically used to mask income and pay less tax.
In some cases, the Donald purchased real estate and other property, and the tax code accorded hefty tax deductions in the form of depreciation deductions. In other cases, he borrowed money that bestowed his tax returns with enormous interest deductions. Finally, whenever Trump sold property, despite his net worth, he paid stunningly low tax rates on the capital gains he collected.
When Trump and the Republican-led Congress had the opportunity to “drain the swamp,” at least with respect to the tax code, they failed mightily, and on purpose. Tax reform legislation Trump hailed in 2017 as a huge victory for ordinary Americans further rigs the system.
For example, Congress introduced a new code section that allows “small” business owners to deduct up to 20% of their income. The only problem is that the vast majority of this deduction inures to large business owners who will now pay less tax on their income than the janitors who clean their toilets. Another section of the code now allows those who experience capital gains to reinvest these gains into so-called qualified “opportunity zones,” offering the possibility to pay no capital gains tax.
If Congress ever decides to make the tax code more equitable, there are several simple steps it can take. For starters, the tax rates for income should be the same regardles of its source, whether it be capital or ordinary. Second, different industries, including the real estate industry, should not be granted special rights or privileges. Finally, Congress must bolster the enforcement arm of the tax code, the IRS, to ensure that taxpayers are truly being compliant with their civic duties and shoulder their appropriate tax burden.
Today, the IRS is no match for well-heeled taxpayers with high-priced accountants and lawyers; they simply run circles around it.
Trump was put into our nation’s highest office for many reasons. Some voters believed he would make the the tax code less out-of-kilter in favor of rich. So far, Trump has failed miserably to fulfill this goal and, if anything, has only rigged the tax system further in his favor and those with whom he hobnobs.
Jay Soled is a professor of accounting and information systems at Rutgers Business School. He is also the program director of the Master of Accountancy in Taxation.
Photo Illustration: Getty Images.
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