The New York Times found the Trumps dodged taxes in ways both legal and fraudulent. Americans care about this and need to see the president’s returns.
In the waning days of the 2016 presidential election, we learned that Donald Trump lost nearly $1 billion in a single year. This peek into his tax situation led his opponent Hillary Clinton to charge that Trump was refusing to release his tax returns because they’d show he didn’t pay any federal income taxes.
Trump retorted, “That makes me smart!” At a later campaign rally, he said that he used the tax code “brilliantly.”
Does paying no federal taxes make Trump the smartest tax guy in the room?
That depends on what being smart about taxes implies. If it’s legal tax avoidance, that’s OK, but if it’s illegal tax evasion, that’s not OK.
We recently got a glimpse into the tax avoidance/tax evasion conflict when The New York Times charged in an investigative repor that Trump has engaged in suspect tax schemes, some of which were “outright fraud.”
Is Trump smart or just a tax con man?
Let’s take a look at these claims and figure out whether Trump is a smart tax man or merely a clever tax con, keeping in mind that the Trump family says, “All appropriate gift and estate tax returns were filed, and the required taxes were paid.”
Tipping the scales toward being smart is that despite the bombshell accusations reported, there has been little public outrage.
Maybe this is because, as the saying goes, people who don’t like paying taxes can be divided into two classes: men and women. Or, maybe people don’t tell the whole truth to the tax authorities. After all, the humorist Will Rogers said that the “income tax has made more liars out of the American people than golf.”
All joking aside, Trump is now president of the United States, and it seems that our president shouldn’t be a tax dodger. Taxes, after all, are what we pay for a civilized society. So, what “smart” tax practices did the Trump family pursue?
One is the estate tax-minimization vehicle called a Grantor Retained Annuity Trust, or GRAT. These trusts, which are totally legal, allow people with large estates to shelter them from tax. Frankly, I work hard and if I managed to accumulate a taxable estate worth say $50 million, I wouldn’t want to send $20 million to the federal government. I’d rather give it to my kids or to charity. Wouldn’t you?
The Times didn’t find fault with the Trumps’ use of GRATS.
The Trump family dodged taxes
Instead, the newspaper charged that they “dodged hundreds of millions of dollars in gift taxes by submitting tax returns that grossly undervalued” the real estate assets they put in their parent Fred and Mary Trump’s GRATs. For example, even though the properties sold for $900 million a few years later, Fred Trump’s 1995 gift tax return said they were worth just $41.4 million. That’s a huge tax dodge.
And the tax authorities noticed, finding on audit that the properties were worth $57.1 million.
The Trumps low-balled the valuation, figuring that although the IRS has rules for determining fair market value, they weren’t likely to be challenged.
That’s a smart move. As The Times said, “It is an open secret among tax practitioners that evasion of gift taxes is rampant and rarely prosecuted.”
Of course, playing a “catch me if you can” game with the IRS has severe consequences for the ability of the government to raise the funds needed to pay for things such as Social Security.
And playing the audit lottery can be risky. Suppose you were about to face an IRS audit? Would the tax strategies that you employed pass muster with the IRS?
If you used a GRAT, it’s likely that the transaction would be approved. Using GRATs to reduce taxes is not only a popular tax reduction method used by the ultrawealthy (think Sheldon Adelson, Mark Zuckerberg, Bill Gates, Lloyd Blankfein, Sam Walton), it has also been approved by the tax courts, been in the tax code for decades, and never been scaled back by Congress. As one tax-advice columnist reported, “GRATs are great.”
GRATs are so popular that Richard Covey, the attorney who identified their potential for minimizing estate tax liability, has been recognized for his brilliance in developing “exciting estate planning techniques” by none other than the American Bar Association.
However, that tax “legend” later had second thoughts about what he created. “You can certainly say we can’t let this keep going if we’re going to have a sound system,” he said in 2013.
One tax strategy The Times identified isn’t very smart. As an example of what The Times called “the most overt fraud,” the Trumps incorporated a company whose main purpose turned out to be to enable Trump’s dad “to make large cash gifts to his children and disguise them as legitimate business transactions, thus evading the 55 percent tax.” That practice, as The Wall Street Journal’s Holman Jenkins Jr., notes, is “a stratagem known to the corrupt as well as those fleeing corruption since the dawn of time: over-invoicing.”
Trump bends the rules, doesn’t pay fair share
One question we might ask about Trump’s tax avoidances and evasions is, “Do we really care?” It turns out that we do. Surveys show that we don’t think it’s morally acceptable to bend the rules to reduce our taxes.
We also don’t even particularly like these “smart” tax-avoidance schemes. An April Gallup poll shows that more than six of every 10 Americans say upper-income people pay too little in taxes.
If anything’s going to make us mad about Trump’s tax planning, it’s that he bends the rules. So, is Trump the smartest tax guy in the room?
He’s smart in finding the weaknesses in the tax code that provide legitimate tax breaks. But he’s not smart in exploiting weaknesses that allow “tax dodging.” The only way to truly know whether he is the smartest tax guy in the room is to see his tax returns.
Joann M. Weiner, a former senior tax economist at the Treasury Department, is an associate professor of economics and director of the Applied Economics graduate program at George Washington University. Follow her on Twitter: @DCECON
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