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Trump’s Taxes: Will They Matter?

Posted on Oct. 5, 2020

Since The New York Times began publishing its mammoth, multipart investigation of Donald Trump’s tax returns, speculation has been rampant. Will President Trump’s reelection campaign be hobbled by the revelation that he paid no taxes in 10 of the previous 15 years? Or will it be the memorable figure of $750 that takes him down: an easy-to-grasp factoid that voters can readily understand — and resent?

Or, alternatively, will Trump emerge from this latest controversy with his standing more or less intact? It’s hardly implausible: Previous tax revelations, including the Times’ own exhaustive investigation published in 2018, have left no discernible mark. There’s a reason people put Trump and Teflon in the same sentence.

But there are also good reasons to think that this time might be different. Tax avoidance is a tricky issue for American politicians, especially when it concerns their own tax payments. It boils down to a single, powerful, political fact: Americans may not like paying taxes, but they really don’t like other people not paying taxes.

Other People’s Taxes

Americans are generally exquisitely sensitive not only to the taxes they pay, but to the taxes that other people pay. Or more to the point, the taxes that other people don’t pay. Vanessa Williamson of the Urban-Brookings Tax Policy Center made this point convincingly, using both survey data and interviews, in her 2017 book, Read My Lips: Why Americans Are Proud to Pay Taxes. She also summed it up nicely in a pre-publication op-ed for the Times: “What upsets most people about taxes is not the amount they contribute,” she wrote. “They are angry about the amount that the wealthy can avoid contributing.” (Prior analysis: Tax Notes, Apr. 3, 2017, p. 17.)

What’s clear in contemporary polling is also evident in over two and a half centuries of U.S. history. Americans have a reputation for hating taxes, which is not entirely undeserved. But all people everywhere hate taxes — it’s hardly a distinctive quality. Nor is it typically the driving force in American fiscal politics. What has really driven most tax debates in American history is not antipathy to taxes but outrage at tax avoidance.

Most of the major inflection points in American fiscal history have been shaped by political arguments over tax fairness. And more often than not, conceptions of fairness have hinged on the relative tax burdens of different groups. Things get interesting when one group is perceived as somehow escaping their “fair share” of the tax burden.

This kind of fairness debate was evident during such marquee moments as the Boston Tea Party or the Whiskey Rebellion. But it was also crucial during watershed moments of fiscal reform, including the Civil War, World War I, and World War II. More recently, it helped power the drive for tax reform in 1986. “There is one group of losers in our tax plan,” President Reagan declared. “Those individuals and corporations who are not paying their fair share or, for that matter, any share. These abuses cannot be tolerated.”

Historically, such arguments have been powerful. Indeed, it’s fair to describe tax avoidance as the single most salient issue in American fiscal politics. Politicians have used it repeatedly to shape every major tax reform in the nation’s history.

But tax avoidance, when it concerns a politician’s personal behavior, can also be treacherous ground. Historically, the best example is Richard Nixon, who famously got himself in trouble for playing fast and loose with the tax laws. (Prior analysis: Tax Notes, June 13, 2016, p. 1527.) Even before he was dunned for his illegal deductions, however, Nixon was pilloried for his modest tax payments. It was only after those payments were leaked to the press that Nixon agreed to voluntarily disclose his returns to the public. (Curiously, leaks indicated that Nixon and his wife had made a 1970 tax payment of $792.81, just slightly larger than Trump’s now-famous $750. Of course, adjusted for inflation, Nixon’s payment would equal something like $5,200 today.)

The Nixon episode is just one more reason to think that Trump could have a problem on his hands. More broadly, the political salience of tax avoidance suggests that Trump might find it hard to navigate the current round of tax revelations.

But then again, past tax revelations have left Trump mostly unscathed. Why should this time be any different?

The answer may lie in a single number.

What’s in a Number?

In journalism, details can make the story, and for the Times story, that detail is Trump’s pair of $750 payments. Overnight, the number has become a touchstone of late-night comedy and internet memes. It’s given the story a kind of pop-culture currency denied to earlier revelations about Trump and his taxes — probably because those stories were simply too complicated to communicate to a broad audience.

The initial Times story reported that Trump had made tax payments totaling $750 in both 2016 and 2017 but failed to explain how the president’s accountants had arrived at that figure. A follow-up published on September 29 offered some details, using data from the 2017 return. In that year, the president reported a loss of $12,819,400. But the alternative minimum tax still left him with a tax liability of $7,435,857. That liability, however, was then more than offset by his $22.7 million general business credit.

In calculating taxes due, however, Trump’s accountants made an unexplained decision: “On the Form 3800 for the General Business Credit, his accountants subtracted $750 from his allowable credit,” the Times reported. “Why they did that is not clear. But the result was a total federal income tax liability of $750.”

Ultimately, the Times provides a lot of context for a decision that remains, on its face, basically inexplicable. Why did Trump decide to pay that unnecessary $750? We can only guess. But the most likely answer is that he was trying to defuse charges (first leveled during his 2016 campaign) that he was a serial nonpayer.

As noted above, successful tax avoidance is a tricky subject for politicians; a little bit can be OK, even evidence of being “smart,” as Trump contended in a 2016 debate with Hillary Clinton. But too much tax avoidance can be a problem. As I wrote in 2016, “in politics, if not in law, the moral status of tax avoidance varies with the avoider’s effective tax rate. More specifically, zero is a hard number to defend.” (Prior analysis: Tax Notes, Oct. 10, 2016, p. 153.) It would seem that Trump probably shares that sentiment, because it’s hard to explain his $750 payments as anything other than a token — an inoculation against damaging charges that he paid nothing.

Trump isn’t the first president to worry about the optics of paying zero; in 1977 Jimmy Carter made a voluntary payment when his income tax obligation of $11,675 was wiped out by a $20,864 investment tax credit. Carter chose to make a payment of $6,000, equal to roughly 15 percent of his adjusted gross income (the White House said the rate was drawn from the AMT, even though Carter wasn’t subject to that levy). (Prior analysis: Tax Notes, Apr. 17, 2017, p. 289.)

Trump seems to have done his calculations somewhat differently (although it’s impossible to know for sure without a statement from the White House, access to the returns, or more detailed reporting from The New York Times). In any case, Trump may be discovering that $750 is actually a harder number to defend than zero.

Zero has the virtue of being consistent with the tax law. By contrast, $750 seems just small and arbitrary. It shouldn’t surprise anyone that Trump’s $750 has already made its way onto bumper stickers, T-shirts, and countless Twitter and Facebook posts. If Trump’s payment was designed to shield him from one problem, it seems to have created a bigger one in the process.

Initial Polls

Ridicule on social media is one thing, but poll data is something else — and something worse. In a recent YouGov survey, 58 percent of respondents said they believed the Times story to be “completely” or “mostly” true; only 11 percent considered it completely untrue, with another 8 percent calling it mostly untrue.

Regardless of whether they believed the story, 52 percent said it was “inappropriate” for the president to pay no taxes, even assuming he broke no laws; 35 percent said it was “perfectly acceptable,” assuming everything he did was legal.

Neither of these results is especially encouraging for Trump. The first question probably reflects not the compelling journalism of the Times story (which few poll respondents have likely taken the time to read), but the degree to which it comports with prior coverage of Trump and his taxes. The Times story adds to an existing narrative — and not in a good way.

The second YouGov question is interesting because it suggests something about the way Americans view tax avoidance, especially as practiced by political leaders. Apparently, roughly a third of Americans agree with Judge Learned Hand that “nobody owes any public duty to pay more than the law demands.” But more than half, to continue with Hand’s framing, seem to “demand more” from their political leaders. Hand believed that such demands were “mere cant,” and perhaps he was right. But Hand wasn’t running for president.

Many Bad Things

Let’s be clear: There’s something troubling about the way these Trump tax revelations came to light. Presidential tax transparency is good, but presidential return leaks are bad.

I don’t fault the Times for pursuing the tax return story once it received the documents. But we should not be relying on leaks to achieve presidential tax transparency. Nor, for that matter, should we be relying on ritual shaming and goading, which is how we’ve enforced the nation’s tradition of “voluntary” tax disclosure by sitting presidents and candidates.

I applaud the willingness of past presidents and major-party nominees to release their returns. But such disclosures shouldn’t be voluntary in any sense. They should be mandatory, legally required in the same way that we demand other kinds of financial disclosure.

More important, tax documents should be disclosed not by the president or candidate personally, but by the IRS. Only when they’re delivered directly from the agency to the public can we be sure that the documents are accurate and complete — that they are identical to the tax returns actually filed with the IRS. Not to accuse anyone — past, present, or future — of lying, but if any political figure ever released an inaccurate version of his return, the public would have no way of finding out, at least under current law. Everyone is bound to secrecy, even in the face of dishonesty.

For those who consider mandatory return disclosure an unreasonable violation of presidential privacy, I have two things to say. First, seven sitting presidents (and many more presidential candidates) have apparently found it tolerable. Being president requires several sacrifices, and while this added sacrifice of financial privacy may be painful, it hardly seems out of bounds.

Second, we now have two examples in which tax rumors have produced tax leaks. You may believe that plugging such leaks is possible, if only we make the penalties draconian enough. But they are reasonably stiff already, and still the leaks happen.

Poll data suggest that Americans have high expectations when it comes to presidents and their taxpaying responsibilities. And when that presidential taxpaying is called into question, the drive to uncover the truth — legal strictures notwithstanding — seems very powerful. The most prudent course is to accept the political reality and make presidential return disclosure a legal requirement.

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