U.S. Politics

Congress needs Trump’s tax returns to investigate $400 billion pass-through scam

The only thorny legal question arises if the full Ways and Means Committee, after debate and a vote in executive session, were to authorize the dissemination of Trump’s tax return into the public record of the House of Representatives. The tax law expressly permits this second step, but the scope of the committee’s authority here requires a separate legal analysis — a point missed by many commentators.

“Forwarding tax information to the whole House should require more substantial justification from the chairman,” Kleinbard points out, “than [Neal] needed to request Trump’s tax information initially.” But Republicans already set the precedent five years ago when they released the returns of 50 “social welfare” organizations supposedly targeted by the IRS. (The mythical “IRS bias scandal” evaporated in October 2017 when an inspector general’s report revealed that during a 10-year span, the agency had applied similar scrutiny to nonprofits across the political spectrum.) Regardless, there’s little doubt that the House Ways and Means Committee, as Chairman Neal wrote, “has a responsibility to conduct oversight of our voluntary Federal tax system and determine how Americans – including those elected to our highest office – are complying with those laws.”

But in the case of Donald Trump, just as important as determining whether the president of the United States is breaking the law is understanding how he benefits even when he follows it. After all, President Trump wasn’t merely lying when he repeatedly promised his 2017 tax law would “cost me a fortune.” As it turns out, the $400 billion, eight-year tax-cut windfall for so-called pass-through businesses will doubtless pass through hundreds of millions of dollars to his own businesses.

To understand why, it’s worth recounting some of the goodies for the gilded class in the Tax Cuts and Jobs Act Trump signed into law in December 2017. The TCJA didn’t just lower the top marginal income tax rate from 39.6 percent to 37 percent for a filer earning over $500,000 a year ($600,000 for a family). The GOP law also slashed the corporate tax rate from 35 percent to 21 percent, a windfall companies have put towards stock buybacks and mergers and acquisitions rather than hiring more workers or investing in new plants or equipment. And as the Center on Budget and Policy Priorities documented in March, the $1.9 trillion, 10-year TCJA delivered huge winnings to one other group of well-to-do taxpayers:

A centerpiece of the 2017 tax law is a new, 20 percent deduction for certain “pass-through” income, or income from businesses such as partnerships, S corporations, and sole proprietorships that business owners claim on their individual tax returns. Before the 2017 law, this type of income was generally taxed at the same individual tax rates as the business owner’s labor income. The new deduction effectively reduces the marginal individual income tax rate on this income by one-fifth, to well below the rate on labor income, such as that from wages and salaries.

But if owners of pass-through businesses pay only an effective rate of 29.6 percent (after the 20 percent deduction) compared to top-earning workers taxed at the top rate of 37 percent, they are similarly advantaged compared to incorporated businesses as well. As Kleinbard calculated:

Corporations pay tax at a 21 percent rate, but dividends paid out of after-tax profits are taxed at 20 percent in the hands of an affluent taxpayer, for an “all-in” tax cost of about 36 percent on distributed profits.

And what are these pass-through businesses so deserving of this unique tax break? “Most every privately-owned local business these days is organized as a pass-through,” Kleinbard says. “Car dealers, restaurants, insurance agencies, real estate development or leasing, you name it.” But as Brookings detailed in 2014, 95 percent of the nation’s 26 million businesses were pass-throughs. Some 99 percent of them are “small businesses” with annual receipts under $10 million. Importantly, “pass-through businesses are not necessarily small businesses.”

While most businesses are small, the majority of economic activity occurs in large businesses—including large pass-throughs. In 2014, almost 83 percent of all sales and 81 percent of profits accrued to businesses with more than $10 million in total receipts, even though those businesses only represented 1 percent of all firms… Most hedge funds, private equity funds, law, consulting, and accounting firms are partnerships; these businesses can be large, global enterprises. Indeed, in 2014, about a quarter of partnership business income was earned in finance, real estate, and holding companies sectors, and about 13 percent by law firms. [Emphasis mine.]

As it turns out, the most famous pass-through businessman of them all now happens to live at 1600 Pennsylvania Avenue. As Tara Golshan of Vox put it in December 2017, “The Trump Organization is a large pass-through.” But you don’t have to take her word for it. Trump’s own tax attorneys told Americans so in a 2016 financial disclosure:

"You hold interests as the sole or principal owner in approximately 500 separate entities. These entities are referred to and do business as The Trump Organization. ... Because you operate these businesses almost exclusively through sole proprietorships and/or closely held partnerships, your personal federal income tax returns are inordinately large and complex for an individual."

Trump’s tax savings were also inordinately large—both before and after he signed the Republican tax bill in late 2017. When the statutory corporate tax rate was 35 percent, CBPP explained, “Many businesses, such as law firms, and groups of wealthy investors choose to be taxed as pass-through entities instead of as corporations and often do so to lower the overall taxes they owe.” Even with the reduction of the corporate tax rate from 35 to 21 percent, pass-through businesses still enjoy a tax advantage thanks to that 20 percent deduction. And the biggest beneficiaries are among the very richest Americans.

That's because more than two-thirds of pass-through business income flows to the highest-income 1 percent of tax filers.

What does that mean for American taxpayers? Through 2024, the United States Treasury will lose $400 billion in tax revenue. In 2024, some 61 percent of the benefits from the pass-through deduction will go to the top 1 percent of all earners. Meanwhile, the bottom two-thirds of pass-through businesses will get only 4 percent of the payout.

As Vox summed it up a year ago:

Of that total, $17.4 billion will go to individuals and households making more than $1 million per year. (Revenue estimators are based on tax returns, so a married couple filing jointly is one taxpayer, and a married couple filing separately are two.) By 2024, the committee estimates pass-throughs will save $60.3 billion on taxes via the new law. More than half of the benefit — $31.6 billion — will go to individuals and households earning more than $1 million.

Among those households are those of Ivanka, Donald Jr., Eric, and Donald J. Trump. It’s no wonder Edward Kleinbard called the pass-through giveaway “Congress’ worst idea ever.”

Of course, you’d never know about the president’s obvious conflict of interest by listening to the man. As a candidate and later as the occupant of the Oval Office, Donald Trump told voters his tax schemes would “cost me a fortune” even as they added trillions in new red ink to the national debt.

In September 2015, Trump made this guarantee about his tax proposals:

“It reduces or eliminates most of the deductions and loopholes available to special interests and to the very rich. In other words, it’s going to cost me a fortune — which is actually true — while preserving charitable giving and mortgage interest deductions, very importantly.” [Emphasis mine]

Two years later, on September 13, 2017, Trump pledged “the rich will not be gaining at all with this plan.” Two weeks after that, the president on September 27, 2017, reassured the American people:

"No, I don't benefit. I think there's very little benefit for people of wealth."

That this was mathematically impossible should have been clear from the very beginning. In the fall of 2015, the Washington Post Fact Checker gave Trump’s claim “Four Pinocchios.” It's no wonder Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center, said, "It's a really nice deal" for Trump and pass-through owners like him. It was with good reason Hillary Clinton called it "the Trump Loophole." And on December 5, 2017, the ink from President Trump’s signature on the Tax Cuts and Jobs Act wasn’t even dry when the New York Times concluded, “Tax Plan Crowns a Big Winner: Trump’s Industry”:

[T]he biggest winner is the industry where President Trump and his son-in-law, Jared Kushner, made their millions: commercial real estate. … House and Senate Republicans, in their divergent bills, both offered steeply reduced rates to corporate giants, partnerships and family-owned firms across the board. But when it came time to eliminate special breaks or impose tighter standards, real estate was generally excused from the room. … Real estate investment trusts, known as REITs, have extra cause for celebration. They are companies that make money by owning, financing and operating real estate. Both the Trump Organization and Kushner Companies, the family real estate firm partly owned by Mr. Kushner, have important deals with such trusts.

“Real estate does great,” concluded Daniel N. Shaviro, a professor of taxation at New York University Law School. “It’s hard to imagine what they might have asked for that they don’t have.”

Just days before, President Trump told a St. Charles, Missouri, audience, “Our focus is on helping the folks who work in the mailrooms and machine shops of America.” The Republican legislation, Trump insisted, would help “the plumbers and the carpenters, the cops and the teachers, the truck drivers and the pipe fitters.” That same day, Trump promised:

“This is going to cost me a fortune, this thing, believe me. This is not good for me.”

That was never true. All along, Donald Trump was planning to have tax revenue directly pass through the United States Treasury into his bank accounts, and those of his spawn. While he and his ilk enjoyed their pass-through paydays, the new tax provisions only encourage tax avoidance and “workplace fissuring” that shifts employees to contractor status or into new companies altogether. As for the folks in the “mailrooms and machine shops of America,” by March 2018 they were already shrugging at the meager uptick in their paychecks. This week, an NBC/Wall Street Journal poll for Tax Day found that only 17 percent of those surveyed said their taxes will go down, while 55 percent reported their IRS bills would remain the same (27 percent) or go up (28 percent).

Congress has to get to the bottom of Trump’s self-dealing, budget-busting tax scam. To understand what he has gotten away with legally, the House Ways and Means Committee must have Donald Trump’s tax returns. And to assess whether and how Trump may have broken the law—whether by selectively overvaluing and devaluing his assets, by potentially laundering money, by mysteriously securing loans through Deutsche Bank, by getting paid in rubles, and even by committing fraud to conceal his payoffs to porn stars and mistresses—the American people must see them, too.

After all, Donald Trump is costing America a fortune. Believe me.

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