Donald Trump and the Political War Over the IRS

 


Photo by Olga DeLawrence | Unsplash

Photo by Olga DeLawrence | Unsplash

Donald Trump is a tax cheat. He admitted it at his rally in Florida last week, just days after the indictment of the Trump Organization and its long-time chief financial officer on charges ranging from tax fraud to grand larceny. Returning to the campaign trail, surrounded by his loyal followers, he relished the opportunity to play the common man besieged by faceless bureaucrats, and the complexities of a tax code beyond anyone’s understanding.

 

“They go after good, hard-working people for not paying taxes on a company car. You didn’t pay tax on the car or a company apartment…. Or education for your grandchildren. I don’t even know. Do you have to? Does anybody know the answer to that stuff?”

 

Of course, Donald Trump is not the common man. Rather, he is emblematic of a culture of tax avoidance – which he once playfully referred to as a “sport” – that has been elevated to the modern entitlement of a small, privileged elite. A recent report from ProPublica focused on the extraordinarily low effective tax rate paid by the richest among us. According to that report, over the five years from 2014 to 2018, the 25 wealthiest Americans, as ranked by Forbes magazine, saw their net worth rise by $401 billion. During that period, based on leaked IRS data, they paid $13.6 billion in federal income taxes – 3.4% of their wealth accretion over that timeframe.   

 

The ProPublica report was not about tax fraud or grand larceny, it was simply about an income tax system that does not tax wealth that is derived from the growth in stock or other asset values until those assets are sold, when “income” is realized. This is not a matter of tax policy, but rather constitutional law. Few people may realize that when the Constitution was drafted, it did not give the federal government the power to impose an income or other direct taxes, but only indirect taxes, such as sales taxes and import duties. Shortly after the federal income tax was created with ratification of the 16th Amendment in 1913, the Supreme Court ruled in Eisner v. Macomber that the increase in wealth that a person might realize through rising stock values did not constitute “income” subject to taxation under the newly created federal income tax.

Such is the law of the land, and it is the reason why Warren Buffett, Jeff Bezos, Michael Bloomberg, and Elon Musk – who saw their collective wealth grow by $160 billion from 2014 to 2018 – paid only $1.7 billion in taxes during that time period, for an effective tax rate of barely 1%. Under the rules established in the wake of the Eisner decision a century ago, stock wealth (referred to as “unrealized gains”) does not become income subject to taxation unless and until the stock is sold.

 

And then there are the myriad other features of the tax code – from those as simple as the lower tax rate levied against capital gains compared to “ordinary” income, to industry-specific tax advantages and inter-generational trusts – that can result in the wealthiest taxpayers paying tax rates that are far lower than the rest of us pay as a matter of course.

 

For example, over that five-year period, Michael Bloomberg reported total income – including “realized” capital gains – of $10 billion, yet he paid less than $300 million in federal income taxes, for an effective tax rate of less than 3%. If tax avoidance is a sport, Bloomberg is very good at it.

 

Donald Trump, of course, was not charged by New York State prosecutors with tax avoidance – defined as legal efforts to minimize the amount of taxes one is obligated to pay – but rather tax evasion, which is when someone steps over the line into tax fraud, and a range of other crimes and misdemeanors, up to and including, it appears, grand larceny. According to the conservative-leaning Tax Foundation and the Congressional Joint Committee on Taxation, the “tax gap” – defined as the difference between taxes paid and taxes owed – is now estimated to exceed half a trillion dollars annually, more than one-third of which is owed by the top 1%.

 

The entire topic of how taxes are levied, enforced, and evaded emerged dramatically into public view over the past few weeks, with an odd confluence of the indictment of the Trump Organization, the bipartisan infrastructure bill making its way through Congress, and the publication by the U.S. Treasury of its annual “Green Book”.

 

The publication of the Green Book – where the Treasury lays out its revenue generation blueprint for the coming year – stirred up a firestorm. It laid out the Biden Administration’s plans to tackle the tax gap and make a dent in tax advantages that have contributed to the massive accumulation of wealth by the wealthiest American families. In particular, those plans contemplate equalizing the tax treatment of capital gains and ordinary income, and forcing the realization of capital gains at periodic intervals within trusts created to pass accumulated wealth – often untaxed – from one generation to the next. 

 

Central to the Biden Administration plans is $40 billion of funding in the bipartisan infrastructure bill for expanded IRS enforcement. The IRS is responsible for collecting 95% of federal revenues, and since 2010, its budget has been reduced by 20% in real terms and staffing has been cut by 22%. As a direct consequence of reduced funding, the share of individual and corporate income tax returns examined has declined by 46% and 37%, respectively.

 

There was a time when going after tax deadbeats was popular political rhetoric among Republicans and Democrats alike, as an overwhelming majority of Americans – north of 85% according to polling data – disdain those who cheat on their taxes. After all, why should taxes be raised on those of us who pay what we owe to fund needed public services, rather than collected from those who don’t? And more to the point, why should the wealthiest Americans, with all their high-priced lawyers and accountants, be allowed to skate by while everyday folks dutifully fill out the short form and pay what the government asks of them. 

 

Since its publication, Green Book panic has roiled the Senate Republican Caucus. The Coalition to Protect American Workers, an anti-tax dark money group founded by former Vice President Mike Pence’s ex-chief of staff, took aim at Kansas Republican Senator Jerry Moran – a member of the bipartisan group crafting the infrastructure bill – with an attack ad portraying the legion of goose-stepping IRS agents that would be unleashed across the land by the infrastructure bill.

 

Republican Senators quickly jumped on the issue, mirroring the words of Texas Senator Ted Cruz, who declared: “Throwing billions more taxpayer dollars at the IRS will only hurt Americans struggling to recover after waves of devastating lockdowns… Instead of increasing funding for the IRS, we should abolish the damn place!”

 

The Wall Street Journal Editorial Board piled on, chastising Republican participation in the IRS funding plan. But even its editorial, which cited the road map for attacking the tax gap published by economists Natasha Sarin and Larry Summer, declined to offer a substantive critique of the Treasury plan, beyond musing plaintively: 

 

“But is that plausible [that investment in the IRS will yield mo
re revenue]? It makes little sense that millions of Americans are willfully violating the tax code. The costs are too high if they’re caught. People who make $5 million a year hire lawyers and accountants to exploit legal means in the IRS code to minimize their tax liability.” 

 

And there’s the rub. The simple truth is that the slippery slope from tax avoidance to tax evasion has been greased by years of slashing funding to the IRS. Over the past decade, the decreased funding and staffing has resulted in an 80% decline in the chance that the tax return of any given wealthy American will be audited. Accordingly, while the editorial argument might make sense in the abstract, in the real world the economic incentives to tiptoe across the line from tax avoidance into tax evasion have been steadily increased.

 

And standing there as Exhibit A on the stage in Florida was Donald Trump, a man for whom the sport of tax avoidance appears to have slid easily into tax evasion. However, unlike your average tax cheat, Trump knows that he will have a back-up if charges are actually brought against him. If his supporters would turn a blind eye to his shooting someone in the middle of Fifth Avenue, he must surely feel confident that he will be able to weather – if not actually benefit from – indictments for tax fraud and grand larceny, should those be forthcoming. And if his supporters continue to stand by him, Republicans in the Senate will be there as well. Pretty soon, no doubt, we are going to see Ted Cruz and others on Fox News or the Sunday shows complaining that what the Trump Organization did is no big deal, and that but for the Trump name, none of those indictments would have seen the light of day.

 

However, there is a larger issue here than the fate of the IRS funding, the infrastructure bill, or Donald Trump himself. It is the diminishing societal consensus surrounding federal tax policy. On the Democratic side of the aisle, growing wealth inequality and Elizabeth Warren’s call for a wealth tax – buttressed by the ProPublica data illuminating vast disparities in how income is taxed – have raised concerns over the fundamental fairness of the federal income tax system.

 

On the Republican side, the uproar over the IRS funding in the infrastructure bill and the dark money ad attacking Jerry Moran suggests that the line between raising taxes and even collecting them has become increasingly faint. 

 

If there is no longer a consensus across the aisle that even taxes on the books should be collected, it may be time to embrace a fundamental reimagining of what we tax and how. Perhaps when Ted Cruz suggests shuttering the IRS, Democrats should take the idea seriously, and consider how much political capital they want to invest in being attacked as the Party of the IRS.


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