Tanzina Vega: On Sunday night, The New York Times published the first piece in an investigation detailing President Donald Trump's tax return data from the past two decades. According to The Times's reporting, the president did not pay federal income taxes in 11 of the 18 years they looked at, and he also reportedly just paid $750 in federal income taxes in both 2016 and 2017.
The revelations about Trump's tax records come less than six weeks before the November election, and with the first presidential debate just hours away, some Americans will be watching closely to see what more the president has to say on the matter. President Trump defended his tax record on Monday by saying on Twitter that he was "Entitled to take advantage of tax loopholes like everyone else". I'm Tanzina Vega, and that's where we're going to start today on the takeaway, looking at our tax code and how these loopholes actually work. For more on this, we turn to Jeffrey Stein, White House economics reporter for The Washington Post. Jeff, welcome back to the show.
Jeffrey Stein: Hey, thanks so much for having me back on.
Tanzina: A lot of tax code stuff to get through, but let's remind our listeners, why has the president not voluntarily disclosed his tax records so far?
Jeffrey: Well, I think we're seeing the reason right now. The president broke decades of precedent and refusing as a 2016 presidential candidate to release his tax returns. He has claimed that he cannot do this because he is under audit, but there is nothing that would stop him from say, having released all the years of his tax returns prior to the current audit. The IRS has not made clear that Trump is unable to do this, and a lot of the attorneys we've spoken to have said that it might be difficult on some of the edge cases related to the audit, but overall he could do it. That has been more or less pretty clearly knocked down fallacy at this point.
The question of why he hasn't released his tax returns became a huge controversy in Congress. House Democrats sued for Trump's tax returns. Treasury Secretary had to explicitly deny a part of the law that says that the tax-writing committees of Congress were entitled to the returns, and yet, of course, now we have them, or now The New York Times has them I should say. We can see a little bit why Trump and his administration were so resistant for the public to see these documents.
Tanzina: We know The New York Times didn't just get them yesterday, they've been working on getting them, or some semblance of them for years now. One of the most striking features, at least to some Americans, was how little the president paid in federal taxes for 2016 and 2017. We're talking $750. Jeffrey, I think I've paid more in my own taxes. How do we even get to that type of a figure?
Jeffrey: That's a great question. Maybe I could try to explain it a little bit for the listeners. Most people, you and I, we pay our federal income taxes on our wages and our salaries. We collect the check every other week from our employers, and then at the end of the year, however much we make, there you go to the tax rate, and you see for your income bracket, how much you pay. That's what most people do.
Separately, many people, I think most people actually work for companies, and the companies also pay what's called a corporate tax rate. Many companies are formed as a C Corp, it's called, and so they pay a separate corporate tax, which is now 21%. The Republican tax law lowered the corporate tax rate from 35% to 21%.
Donald Trump is actually in neither of those categories, either the personal income tax situation that I described for wages and salaries, or in the corporation and corporate business tax. He's formed as what's called a sole proprietorship or an S Corp. These are called pass-through entities. What a pass-through entity means, there's a bunch of different formal legal structures that constitute pass-throughs, but the upshot is that the business owner pays his taxes on his business and his personal taxes as one combined thing. That means that his personal income tax obligations is often just reflective of what the business is doing.
In Trump's case, he's taking such tremendous losses, particularly on his golf courses, that he's able to offset his other tax obligations, including what we normally think of as your federal income tax obligations. Trump has a ton of money, he has a ton of assets, but what's known as his AGI, his Adjusted Gross Income, which helps determine your federal income tax rate is actually quite low. Because if you're formed as a sole proprietorship, or as an S corp or as the pass-through, you're acquiring these assets, they're increasing your net wealth, but they're not actually leading to your average income to be that high. That's why Trump's income payments, federal income tax payments were only 750.
Tanzina: Jeffrey, I want to stop you there for a second because I feel there's a lot of stuff. That's super interesting, and a lot of Americans probably don't own golf courses that are losing money and all that other stuff. This feels like something that really affects uberwealthy Americans, right? In terms of how they interpret the tax code, and how they're able to take advantage of some of the loopholes that you're describing that the rest of us just aren't able to do. What is it about the tax code that really favors wealthier Americans?
Jeffrey: Well, that's a really great question. The point that you just raised about the enormous discrepancy here, we talked to a bunch of tax experts who looked at this data, and I looked at some of the data myself. It really seems like Trump's average federal income tax payment in 2016, and 2017, amounted to the federal income tax payment of someone who earns between $40,000 and $50,000, a year. Average over the course of 20 years, from what we know about Trump's taxes, he probably paid income taxes of someone who earned about $150,000 a year annually.
I don't need to tell anyone this, but just worth pointing out that Trump does not live like someone who makes 150K annually, or 40K, or 50K annually. He lives like a billionaire, and he has an incredibly lavish lifestyle, and the planes, and the jets, and the towers and the golf courses. You go on and on and on, but this legal structure that as you said correctly, the vast, vast, vast majority of Americans do not have the capacity to deduct millions of dollars in business losses off of their taxes.
This part of the tax code is relatively old, but this is part of a longer trend in America, where we really do not tax our rich people at the same rates as other countries, or really even at the same rates that we once did. Americans at the top end of income distribution used to pay far more in taxes, in the 1960s. The richest 400 Americans had an average effective federal tax rate of well over 50%, and now that number is less than 25%.
There's lots of complicated reasons for that, but a big part of it is that we have decided as a country not to tax the rich as much as we once did. We fund many social services at a less generous rate than we once did as a result in part, and we've really underfunded the IRS, and the number one source of IRS audits, the IRS is going most aggressively at auditing the earned income tax credit, which is a credit for low-income workers. The amount of IRS enforcement on the rich has really plummeted. There's a lot of-
Tanzina: In other words, Jeffrey,-- I mean, there's been reporting on this that the IRS is aggressively going for what you said, the earned income tax credit, and those are largely low-income workers, people of color, poor people, right?
Jeffrey: That's correct. We don't know exactly what the situation or maybe The Times hasn't told us and will later this week, but we don't know precisely what is going on with the IRS audit, but we can certainly say that the IRS has stepped up enforcement of the poor in part because it's low hanging fruit. Poor people can't hire expensive attorneys to fight these battles in court. A lot of the scrutiny of the rich has gone, either neglected or under noticed.
A big thing that The Times revealed is some of the ways in which Trump was dramatically stretching the bounds of these deduction rules. Ivanka Trump was paid hundreds of thousands of dollars even though she's an employee of the company. She was paid to be "A consultant", and then the Trump Organization deducted that payment to Ivanka as a consultant from its tax burden.
Was that a legitimate payment? Was that something that-- there's a real service offered through consulting fees that was critical to the business that warrants a tax write off? We don't know exactly what's going on with the IRS audit in a specific case, but the kind of thing that the IRS is paying a lot less attention to, in part because Congress has told it to, and has allowed that to happen.
Tanzina: What's interesting to me, also, Jeffrey, is that when we think about the wealthiest people in this country, the 1%, and I've done a lot of reporting on who those folks are, 95% of that group are white people. They're very, very small percentages of people of color, Black people, Latinos, Asians, Indigenous people who also create or have that level of wealth. I'm wondering, it's almost hard to imagine that a person of color in the same situation as Trump would be as supported because we are hearing from some of his supporters that they think this is just fine.
Jeffrey: Yes. I don't know about racial prejudice in the IRS, but given systemic racism in this country and in the government, it wouldn't surprise me one bit. It's worth noting that even for rich people, Trump is exceptional. Mitt Romney and Warren Buffet, they pay low taxes and there was a lot of scandal and outrage over their low tax payment. But they paid more than Trump appears to.
I would just add that we look at what's happening with the election and you may certainly be right that the vast majority of Trump supporters don't care, but the polling for Trump has not been good. Democrats don't need every Trump supporter to be outraged by this. They only need 5% or 10% of the people who voted for Trump in 2016 to say that this is outrageous and they won't-- maybe more of them will stay home. Maybe they'll vote third party. The margins were so close in 2016 that Trump doesn't have a lot of room to lose.
Tanzina: Let's talk about that, Jeffrey, because we've got a debate in just a couple of hours between Joe Biden and President Trump. It's the first debate that we'll be having. We're very close to the election itself. Has the Biden campaign said anything about this and how much do you expect this will come up in tonight's debate?
Jeffrey: Biden has tweeted. Last night he tweeted about the need for the rich to pay their fair share. I think that's a pretty clear jab at Trump. From the Biden people I've spoken with, their attitude is that this is not just a characterological issue as they see it about Trump. They also see this as a matter of economic policy where Trump has pushed. It's actually a little more complicated than they want to admit, but it is true that the 2017 Republican tax act approved and signed into law by the president reduce federal tax obligations for the 1% of the rich. They actually may have squeezed Trump and other ways the state and local tax deduction for instance was dramatically scaled back. Since Trump lived in New York that may have hurt him a little bit.
As a general matter, it's certainly true that Trump has benefited personally from this very low tax regime on the rich and moreover that he has been a lead proponent of continuing to lower taxes for the rich. Trump and the Trump campaign has talked about cutting capital gains taxes in the second Trump administration. We've talked a lot about how reporting a lot about how Trump has unilaterally looked at doing this. From the Biden campaign's perspective, this is a really bad political issue where they see this link between Trump's own ability to pay only 750 in federal income taxes and Trump's policies of cutting taxes for the rich.
Tanzina: I'm going to leave it there. Jeffrey Stein, White House economics reporter for The Washington Post. Thanks so much.
Jeffrey: Thanks for having me.
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