Taxation & Estate Planning

The big New York Times story on Trump's taxes

 Yesterday I feverishly wrote under a short time window, and then posted via the kind offices of justsecurity.org, a short analysis of the big New York Times story regarding Trump's taxes. You can read it here.

This will be an ongoing NYT story, as they have promised follow-ups. Day 1 was an overview, but there will be deeper dives into multiple issues over the next few weeks.

A question I DON'T address in my commentary is: What does it tell us about the U.S. federal income tax system?

A common answer is: It shows how badly screwed up the system is. But I actually don't agree. Or rather:

(1) It shows how badly we have miscarried on the auditing and enforcement side, and

(2) I'm not saying that the system is good. It's just that almost nothing here shows what is wrong with it, OTHER than  the egregious enforcement failures.

Trump succeeded in paying very little tax for two main reasons. The first is that he is a clown, hence he kept losing large sums of money. It's not unreasonable to allow, as our system generally does (albeit with restrictions responding to abuse concerns), losses in one year to offset income in other years. The putz actually lost millions of dollars because he is under-qualified to run a corner grocery store. Give him money to play with, and he rapidly loses it through stupidity and vainglory.

The second is that he took a lot of tax positions on his returns that look as if they could not withstand the slightest scrutiny. For example, he appears to have blatantly mischaracterized personal expenses as business expenses. But that is an inherently hard line to draw, and is fact-specific. As a matter of design, not only income taxes but consumption taxes inevitably run into this problem. (In a VAT, the parallel issue might have been labeling consumer purchases as business inputs.)

Likewise, when taxpayers compute their business proceeds, it's reasonable to allow consulting fees to be deducted, but this gives them the opportunity to lie by adding in fake consulting fees that are actually, say, gifts to one's kids. The solution is auditing and stiff penalties for fraudsters. Throw some of these folks in jail, and their tax advisors too if they were involved.

The probably unmeritorious $72 million refund is in a slightly different category. As I discuss in the above piece, its permissibility depended at the time on a sharp distinction between an asset that has lost all of its value, and one that has merely lost almost all of its value. But even so, proper auditing ought to have sufficed here as well.

BTW, the apparent reason THAT claim got audited is that requests for large cash refunds automatically draw a special auditing and review process. Had the numbers played out differently in a year-to-year sense, while adding up to the same multiyear sum total, there is every reason to think that it would have evaded all scrutiny (until now) as well.

Trump is in all respects a tribute to the collapse of white collar law enforcement. He would have gone to jail decades ago, and probably for a good long stay, if such enforcement had not collapsed politically because white collar criminals have money and friends. The income tax story from the NYT is part and parcel of this. Even before the recent sharp decline in serious IRS auditing of rich people and big corporations, the fact that someone can cheat after year, almost in broad daylight, without running into the minimal review that would have been needed to demand major adjustments (and probably to apply significant penalties), and where this is based mainly on abuse of the line-drawing issues that an income tax inherently faces (and that, in many cases, a consumption tax would face as well), the end result is an indictment of our system, all right - but just on the auditing and enforcement end.

Full post as published by Start Making Sense on September 29, 2020 (boomark / email).