It's Even Worse Than You Think

by David Cay Johnston

  On April 26, his ninety-sixth day in office, Trump had yet to introduce tax legislation. It was more than a week after the historic Tax Day when income tax returns came due. But that day America finally saw a Trump administration tax plan. Well, sort of. Treasury Secretary Steve Mnuchin and Gary Cohn, the White House economic policy director, delivered a one-page statement to reporters. The “plan” totaled one hundred words. Those words read more like a hastily compiled tax cut shopping list for clients of Goldman Sachs, where both Mnuchin and Cohn had worked for years, than what the 90 percent were promised.

  Cohn, who had been No. 2 at Goldman Sachs, complained about questions reporters asked for which he had no answers. “We’re holding a bunch of listening groups right now,” Cohn said, indicating that rather than coming into office with a plan, Trump was trying to find support for some sort of plan.

  “We are working very diligently with the House and the Senate on coming up with final details of the bill. You’re going into very micro-details,” he said. “We’re holding a bunch of listening groups right now. We have outlines; we have a broad-brush view of where they’re going to be. We’re running an enormous amount of data on the proposals right now. We will be back to you with very firm details. We’re very confident to where they’re going to be, we just wanted to get out and give you a broad-brush overview where we are.”

  The hundred-word plan would change the amount of income people could earn before income taxes began. The threshold was set at $24,000, half that for singles. This was less than half the $50,000 Trump had initially promised married couples. This was hardly the big savings Trump used as bait to lure voters by promising to remove half of them from the income tax rolls.

  That Trump had tricked voters about their individual taxes became clear as soon as the Tax Policy Center ran the proposal, such as it was, through its time-tested computer model.

  Among those making $20,000 to $30,000 in 2018 when the plan would take effect, only one in six households would get any tax savings. Those who did would save on average $40. Half of households making $40,000 to $55,000 would get a tax cut. The lucky half would save $34. These minor tax savings are as different from the tax wizardry Trump promised as the mythical Emerald City of Oz is from dusty Kansas.

  The one percent, with annual incomes starting at about $600,000 in 2018, could expect to collect about a fifth of all the income in America and pay about two fifths of the income taxes, the Tax Policy Center estimated. They would get much bigger tax savings, however, enjoying two thirds of all the reduced income taxes.

  The story was even better for the thin slice of Americans who, like Trump, make more than a million dollars a year. Tax cuts would go to the vast majority of these very high-income households. Six of seven would pay $62,000 less annually, with benefits concentrated far up the income ladder among people making many millions and more. While the million-dollar-and-up club is a tiny slice of all households, about one in 365, Trump would give them 24 percent of all the tax savings, the Tax Policy Center estimated.

  Later the administration offered a nine-page plan, if you counted the cover sheet, that was more white space than text. Analysis by the Institute on Taxation and Economic Policy showed that the first-year tax cut would total $191 billion. The best-off one percent, those making more than $616,000, would get two thirds of all the tax savings. The middle class, those making $41,000 to $66,000 in 2018, would get just 6.5 percent of all the tax savings. They would save on average $410, but one in seven among them would pay slightly more in income taxes. The next group, the fifth of Americans with incomes of $66,000 to $111,000, would save $530 per taxpayer. The poor, those making less than $24,000, would get a tax break, too—two bucks a week on average.

  The numbers showed a tax plan not for the vast majority of the American people, the left-behinds who embraced Trump as their savior, but for the political donor class, a gift from Trump to his fellow plutocrats.

  There were more Trump goodies for the already rich in the one-hundred-word plan. It called for eliminating the estate tax, which Trump had pledged to do in his campaign.

  * * *

  The most generous and highly concentrated Trump cuts were reserved for business—not all businesses, but big businesses. Again, Trump was with Wall Street, not Main Street, the exact opposite of his campaign theme.

  Mnuchin emphasized that late April afternoon that the 35 percent corporate tax rate would be slashed to 15 percent. He also said it would apply only to domestic profits, exactly as Trump had promised in 2015. Profits earned outside the country would be subject to foreign taxes only. Depending on the rules, that could be a boon to American companies but it could also open to door to massive tax avoidance, worsening the federal debt Trump rails against.

  The key question Mnuchin failed to address concerned profits earned in the United States and then siphoned out of the country as tax-deductible expenses. Through accounting tricks and a single line added to the tax code in 1986, multinational American companies could convert the burden of taxes into a profit center. Enron, the energy trading firm that collapsed in 2001, was a pioneer in these techniques with more than six hundred offshore entities created to put its profits beyond the reach of the tax collector.

  One way companies do this is by paying fees to themselves. Many companies place their corporate logos, formulas for making drugs, and other valuable intellectual property in offshore subsidiaries. When they sell a pair of shoes or sell a pill, they pay the offshore subsidiary a royalty for the use of their own logo or formula. This converts what would otherwise be a dollar of American profit into a tax-deductible expense paid to a foreign corporation, even though the money stays inside the parent corporation. It is as if Congress gave you a tax deduction each time you took a dollar bill in your right pocket and moved it to your left pocket. It’s also a deal that benefits only multinationals. Purely domestic American companies, which includes most family-owned businesses, are not eligible. Once the profits are transformed into expenses and moved offshore, the money can be invested. Over the years, thanks to the magic of compounding, the deferred taxes will earn so much interest that the company can pay the tax and still have more money than if there was no corporate income tax. It’s eating your cake and having it, too, often with an extra slice.

  Another aspect of the Trump tax plan would, read literally, raise the tax rate on profits of many small businesses by half. The White House announcement proposed a flat tax rate of 15 percent on business profits even though many family-owned enterprises make such a modest profit that they pay only 10 percent. Were Congress to move on Trump’s plan, lawmakers would, no doubt, make sure that small businesses paying the 10 percent rate continued to do so. But the focus by the Trump administration on the top rate showed how little thought it gave to the millions of mom-and-pop businesses. Middle-income Americans would get scraps while the rich enjoyed tax savings each year larger than what middle-class families earned.

  Owners of small businesses typically seek to report little or no profit, taking money out instead as salary for relatives, contributions to retirement plans, and expenses they can charge to the enterprise, which is known as “the benefits of ownership.” Of the nearly six million American corporations operating in 2013, close to four million had assets of less than $500,000. Their average profit was $1,825. The average federal income tax was $357, or less than a dollar a day. Another 374,400 corporations were slightly larger, with assets of a half million dollars to a million dollars. Their average profit was less than $11,000 and their average tax was less than $2,800. In neither case were taxes a major constraint on success.

  Another way to evaluate small businesses is to calculate how much revenue these businesses take in from customers that ends up paid as federal corporate income taxes. It was less than a dollar on each thousand dollars of revenue, hardly a crushing burden.

  At the top, fewer than 3,300 corporations owned 81 percent of all corporate assets. They paid an average tax rate of 21 percent, fa
r below the 35 percent rate set by Congress, many because of those rules favoring tax avoidance by multinationals. Cut their tax rate to 15 percent and these big businesses would enjoy a massive windfall worth several hundred billion dollars a year. As with people, the Trump plan aimed to help the biggest businesses, not the most.

  In tax policy, especially with a rich man in the White House, a reasonable question to ask is how would Trump benefit. We’ll examine that next.

  Trump’s Tax Return

  Standing on a strip of white sand beach along the Intracoastal Waterway on March 13, 2017, I held my iPhone with outstretched arms to record a panoramic view of Mar-a-Lago and neighboring Florida mansions. Halfway through the panning, my phone vibrated. Amy, one of my five grown daughters, told me that among the day’s mail delivered to my home in western New York State was a letter whose contents she had scanned and emailed.

  “LOOK AT—tax document” the subject line read. When the attachment opened, I momentarily stopped breathing. On the tiny cell phone screen I could just make out two pages of Donald Trump’s 2005 federal income tax return. Never before had the public seen a single page from a Trump federal tax return. And while as a candidate Trump pledged to make his tax returns public, once he became president he said no one would ever see them.

  Two thoughts hit me.

  Is this real?

  Does anyone else have this?

  Turning to my host, the storied criminal defense lawyer Glenn Zeitz, who had been showing me around Palm Beach, I said I had to drop everything to work on authenticating and analyzing the document. Zeitz had been regaling me with the story of how he had bested Trump in a lawsuit, saving the home of Vera Coking, an elderly Atlantic City woman who refused to sell Trump her home. (The casino mogul got government officials to try to seize her house for his benefit. Zeitz saved the day by winning a court ruling that Trump abused his position, preserving Coking’s home.)

  The next evening, after the White House authenticated the document, I broke the tax return story at DCReport.org, the website my friends and I created to cover what Trump and future presidents do, as opposed to what he tweets. That night Rachel Maddow and Lawrence O’Donnell had me on their MSNBC shows, as did ABC’s Good Morning America, CNN, Democracy Now!, and other shows the next day.

  The Form 1040 was just a keyhole view into Trump’s taxes. Luckily, I knew that a great deal could be distilled from these two pages because I have spent decades reporting on our tax system and was deep into drafting a proposed new federal tax code for the twenty-first-century economy.

  The most important revelation came from Line 44. It showed that on the $152.7 million that flowed into Trump’s pockets that year, his regular federal income tax was just $5.3 million. But for a stopgap in federal tax law, that was all he would have paid.

  That meant Trump’s regular income tax rate was less than 3.5 percent on this enormous income. That rate was less than the poorest half of American taxpayers paid that year. They paid a tad more than 3.5 percent on their average incomes of just $16,000, IRS data showed. In 2005, it took Trump less than fifty-five minutes to earn $16,000.

  The second biggest issue his tax return raised was about how he would benefit from the big tax reform package that he promised but had yet to propose.

  Before this document, all that the public knew about Trump’s taxes came from two limited disclosures. His income and taxes for five years in the 1970s had been revealed when Trump obtained his Atlantic City casino license more than three decades earlier. It showed that in the last two years, 1978 and 1979, he paid no income taxes because he had paper losses on real estate he managed. Under special rules put into place by Congress that protect the political donor class, his taxable income was less than zero even as he lived a lavish lifestyle. In 1979, he reported an income of minus $3.4 million for tax purposes—resulting not only in a tax-free single year, but the ability to roll unused tax savings into future years.

  The second insight came a few weeks before the election. The front pages of Trump’s 1995 state tax returns filed in Connecticut, New Jersey, and New York had been sent anonymously to The New York Times and the New York Daily News. Susanne Craig of the Times said the plain brown envelope she found in her mail slot at work showed “Trump Tower” as the return address. Her reporting partner, David Barstow, sought my help on the story they wrote without telling me what they had.

  The state tax documents revealed that at the end of 1995 Trump had $918 million of tax losses—negative income—that he could use to offset future income, a tax benefit that proved to be important to understanding the 2005 federal tax return.

  How Trump obtained the $918 million is the story of a tax shelter so odious that when Republicans in Congress learned of it, it took them only a few weeks to pass a new law to demolish the tax shelter. However, as it usually does, Congress let those who had already bought this sham keep their ill-got savings.

  The sheltering technique involves a lot of technical details. For tax wonks the short version is this: Trump’s shelter combined tax benefits under section 1231 of the Internal Revenue Code with the exception provisions in section 108, a concoction that is now illegal.

  The device involved Trump reporting a tax loss of a billion dollars. He did this by claiming as his personal business loss nearly a billion dollars he had borrowed from the banks but never paid back. The banks had already deducted the loss on their corporate tax returns. What Trump did was to take that deduction again for himself.

  Normally when people borrow money from banks and don’t pay it back, they owe tax. Congress treats unpaid loans as income, which they are. Millions of Americans learned this the hard way when the housing market melted down in 2008 and banks lowered the balances on some mortgages so people would not abandon their homes. These homeowners then got IRS notices telling them they owed taxes on the amounts their mortgage lenders forgave.

  The only way out of being taxed on loans not paid back is to get the debt discharged in federal Bankruptcy Court.

  Trump had not filed personal bankruptcy when he got his relief in 1990 from roughly a billion of the more than $3 billion he had borrowed. Instead his lawyers negotiated a deal with the banks. Then they persuaded New Jersey casino regulators to take his side in the negotiations with bankers. For New Jersey politicians with pliable ethics, this was not an especially hard choice. Except for two small lenders, the bank headquarters were in New York and more distant jurisdictions. Trump was a major employer with thousands of people working at his three Atlantic City casinos.

  Once the casino regulators pointed out to the banks that if they foreclosed on Trump, they would be the owners of seaside hotels without gambling licenses—meaning vastly less resale value than licensed casinos—the banks surrendered. This was not how the casino law was supposed to work. A trustee was supposed to keep the casinos open if the owner was unable to pay his debts as they came due. But Trump’s political influence won out over integrity in New Jersey government.

  Because this was a private deal done outside of bankruptcy court, Trump faced a tax bill of about a third of a billion dollars. That’s where the tax shelter came into play.

  In step one, Trump essentially gave up his right to future real estate paper losses on his casinos. Instead he used the remaining value of the buildings to offset immediately the income he got from not paying his loans back in full. In step two, five years later he put the casino hotels, their value as real estate tax shelters now eliminated, into a publicly traded Trump casino hotel company. It never made a penny of profit, losing more than $1.3 billion before shutting down after thirteen years, the investors wiped out. Meanwhile, Trump paid himself $82 million in cash for heading the company. Step three was buying the tax shelter Congress later shut down. The shelter was based on the faulty economic premise that the losses the banks took were really Trump’s because of the change in the value of his assets.

  The 2005 federal income tax summary pages showed what was left of the shelter.

/>   Adding up the wages, rents, profits, and other income on the 2005 federal tax return revealed that Trump enjoyed $152.7 million of income flowing into his pockets. But the last line on the front page of the return showed that his adjusted gross income was only $49.6 million.

  The huge difference came from $103.2 million of negative income.

  That indicated that Trump had by 2005 used up $815 million of negative income from the tax shelter and in 2005 took the last $103.2 million to lower his taxable income. In turn, that revealed that Trump’s annual income for the previous ten years averaged at least $81.5 million. If Trump found new ways to generate negative income, he may have enjoyed even more money without sharing in the burden of supporting the federal government that weighed on everyone else.

  So long as he had unused value in the tax shelter, Trump would be able to offset dollars he earned with dollars from the tax shelter, paying little or no tax. “Little” is a qualifier because of complex interactions among the tax rules governing deductions; some taxes may have come due despite his big-bucks tax shelter, but vastly less than his income would normally warrant.

  During the September 2016 presidential debates, Hillary Clinton said Trump “doesn’t want the American people, all of you watching tonight, to know that he’s paid nothing in federal taxes” in at least some years.

  Trump did not argue the point. Instead, he interrupted Clinton. “That makes me smart,” he said.

  There was another important element to his 2005 income tax return. In addition to the relatively tiny regular federal income tax, Trump had to pay $31.6 million of Alternative Minimum Tax or AMT. That brought his total tax bill to almost $36.6 million.

  The White House issued a statement saying that despite “substantial income figure and tax paid . . . the dishonest media can continue to make this part of their agenda, while the President will focus on his, which includes tax reform that will benefit all Americans.”