Editor’s Note: Edward J. McCaffery is Robert C. Packard Trustee Chair in Law and a professor of law, economics and political science at the University of Southern California. He is the author of “Fair Not Flat: How to Make the Tax System Better and Simpler” and founder of the People’s Tax Page. The opinions expressed in this commentary are his own. View more opinion at CNN.
A year-end apology: As someone who has been writing for years about the never-ending tale of former President Donald Trump’s tax returns and his nondisclosure of them, I initially thought that there was not much new to be learned from the House Ways and Means Committee’s disclosure of six years of returns from just before and during Trump’s presidency.
I was wrong. Trump tales never end, and surprises keep coming. Two stand out.
Surprise number one is that Trump paid some federal income taxes. No, not the $750 he paid in 2016 or 2017. That is not surprising, given the prior New York Times reporting on this point, even if it is a little odd. The surprise, rather, is that Trump actually did pay significant income taxes in 2018 and 2019.
Over the six years covered in the House report, Trump paid net income taxes of $641,931 in 2015; $750 in 2016; $750 in 2017; $999,466 in 2018; $133,445 in 2019; and $0 in 2020.
The numbers show that Trump returned to Trump-normal – no income taxes paid; forget that $750 stuff – in his last year on the job. There are questions about how Trump got his taxable income down in all these years, such that he “only” had to pay about $1 million in 2018, a tax rate of 4% on his adjusted gross income of more than $24 million. Some of these questions will be answered when the committee releases its full tranche of documents, thousands of pages worth, to keep public-spirited accountants off the streets at holiday time.
But the glaring question to me is why did Trump pay any taxes at all during his presidency? That’s the outlier, the dog that is barking. Born into an aggressive tax-avoiding family, why would he ever pay income tax? The $0 paid in 2020 rebuts any notion that Trump had a civic-minded change of heart while in office. One has to ask, what’s up with 2018 and 2019?
It turns out that Trump had capital gains of over $20 million in 2018, and over $9 million in 2019 – and apparently none in 2020. So the question becomes, why did he sell any capital assets at all in 2018 in particular?
Readers of my columns will know, I hope, that the rich do not have to pay taxes. They can play a game I call “Tax Planning 101,” following the simple advice to “Buy, Borrow, Die.” This strategy involves buying assets that typically go up in value over time, like real estate or stock, holding these assets until they die, and then allowing the taxable gain to magically disappear under the stepped-up basis on death rule.
Trump, the self-proclaimed king of debt, has played this game to perfection. Plus, Trump could have sold assets in any of the many years – including 2020 – when he had actual real losses from losing money on his properties that could have offset his taxable gains. Why sell and pay any tax at all in 2018 and 2019?
Two reasons come to mind. One might have been desperation for cash – and an inability to borrow enough to support the Trump lifestyle. The other reason could be that the price of the sales was so favorable – perhaps because he was president? – that even with the taxes paid, the deal was worth it.
Of course, both explanations could be true. And, since Trump purportedly relinquished day-to-day decision-making authority over his assets during his presidency, the decisions may have been made for him by his sons.
Either explanation – being highly leveraged and desperate for cash or getting a sweetheart deal from someone – calls Trump’s potential conflicts of interest while in office into question. Trump’s legal team, of course, fought to keep the returns secret and called congressional demands for the documents “far-reaching.”
But this is the kind of information we the people should know, and the House Ways and Means Committee did well to get the information out to the public.
Surprise number two is that the IRS did nothing. At all. And this notwithstanding the fact that the Internal Revenue Manual, or IRM, contains a policy, in place since 1977, that the “[i]ndividual income tax returns for the President and Vice President are subject to mandatory examinations.” But the IRS did not do any examination of Trump’s tax returns until after the Democrats took control of the House, and Ways and Means Committee Chair Richard Neal sent a request on April 3, 2019.
Representatives from Treasury and the IRS were questioned by the Ways and Means Committee, which asked, “Just because it is written down in the Manual, that does not mean it is done. What kind of guarantee can you put in place that the IRM procedures are being followed?” The answer was, “That’s an interesting question.” Even my under-slept, unprepared first-year law students can do better than that.
Why didn’t the IRS do its job? At various junctures, they refer to the length of Trump’s tax returns, their own lack of resources and the fact that Trump returns were signed and approved by lawyers and accountants. The excuses are so poor that I wouldn’t let those sleepy law students get away with them. How can a well-known, tax-averse, putatively billionaire president escape a mandatory IRS audit?
As you ponder that question, here’s one final query for the holidays: How can Republicans in Congress continually oppose greater IRS funding, especially and specifically for auditing wealthy individuals, when the IRS presently seems unable to follow its own guidelines in auditing one particular individual, the President of the United States?
Alas, the answer to that question is not nearly as surprising as it should be. And we can expect no apologies from anyone for not answering it better.