Donald Trump constantly spouts falsehoods. Sometimes he merely shades
the truth outrageously. Other times he tells full-on whoppers. And
that’s what he did in Indiana on Wednesday, when he said that the new Republican tax-reform plan “is not good for me.”
Trump hasn’t released his tax returns, of course, so it’s difficult to
estimate precisely how much money he will save if his tax plan goes
through. But since last summer, when Trump’s Presidential campaign
released an initial version of his vision for tax reform, tax experts
and journalists have been pointing to aspects of it that could benefit
him greatly. Among others, the Washington Post’s Jim Tankersley,
NPR’s Jim Zarroli, and Slate’s Jordan Weissmann have investigated different ways that
Trump stands to benefit. I’ll briefly try to explain each of the reform
proposals that these reporters have previously looked at, and also
mention one additional way that the tax plan could end up being a boon
to the President’s businesses.
For starters, Trump would benefit from the abolition of the alternative
minimum tax, which the Internal Revenue Service uses to insure that
high-income people who have a lot of deductions and sheltered income
contribute at least a minimum amount to the federal government. In 2005,
the only tax year in the past couple of decades for which we’ve seen any
of Trump’s filings—someone leaked two pages of his return to the financial journalist David Cay Johnston—he paid $38.4 million in
federal taxes, and $31.3 million of that was to cover his A.M.T.
liability.
Without the A.M.T., Trump’s tax bill that year, including
self-employment taxes, would have been just $7.1 million. (This despite
the fact that he grossed $152.7 million in business income, capital
gains, salary, and interest.) Obviously, we can’t be absolutely sure
that the A.M.T. has hit Trump in other years, or that it would hit
him in the future. But, as a real-estate developer who can take
advantage of many different deductions and loopholes in the tax code, he
is exactly the type of taxpayer that the A.M.T. is designed to catch.
Another element of the G.O.P.’s tax plan that would benefit Trump is the
proposal to tax so-called pass-through business income at a rate of
twenty-five per cent. The White House is marketing this as a way to
reduce the tax burden on small-business owners, who typically report
their incomes on their personal tax returns. But it would also be a big
gift to the owners of large private businesses, such as the Trump
Organization, which are structured as investment partnerships, L.L.C.s,
and S corporations. Just like mom-and-pop stores and restaurants, these
much bigger firms “pass through” their income to their owners for tax
purposes. At the moment, the I.R.S. treats this income like salary
income, which means that anyone with taxable earnings of more than four
hundred and forty thousand dollars a year pays the top rate of 39.6 per
cent. But if the Trump tax plan goes into effect these high earners will
see their tax rate reduced to twenty-five per cent—a huge reduction.
How can we be sure that Trump has a lot of pass-through income? Because
he and his lawyers have said so. In March, 2016, Trump’s tax attorneys
issued a disclosure letter that said, “you
hold interests as the sole or principal owner in more than 500 separate
entities. These entities are collectively 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.” The letter didn’t reveal how much
taxable income these companies generated. But in his 2005 tax return
Trump said he had earned about $42.4 million in “business income,” and
$67.4 million from “rental real estate, royalties, partnerships, S
corporations, trusts, etc.” Clearly, these are substantial sums.
The third element of the tax plan that would benefit Trump (and his
heirs) is the abolition of the estate tax. Trump has claimed to be worth
at least ten billion dollars. Even if he is really only worth a tenth of
that—a billion dollars—his estate would greatly exceed the threshold for
getting hit by the estate tax, which is currently about $5.5 million.
If Trump wanted to bequeath a billion dollars to his family members,
they could theoretically face a federal-tax bill of up to four hundred
million dollars. (The estate tax’s top rate is forty per cent.)
Of course, for people as rich and as tax-averse as Trump, there are ways
to minimize, if not completely avoid, the estate tax—by, for example,
setting up specialized trusts. In the country’s wealthiest Zip Codes,
estate planning is a thriving industry. But the fact remains that some
large fortunes are hit by hefty estate-tax duties, and Trump’s could
conceivably end up being one of them. Abolishing the tax now would be a
potential boon for his heirs, and for him.
An additional aspect of the tax plan that is favorable to Trump, and
hasn’t received much attention, is its treatment—or non-treatment—of the
aforementioned special benefits in the tax code that real-estate developers like
the President enjoy. These range from unlimited deductions for interest
payments on bank loans to generous treatment of losses on failed
projects. On one line in his 2005 return, Trump reported “other income”
of a deficit of a hundred and three million dollars. The statement
explaining this loss wasn’t included in the few pages of the return that
leaked, so we can’t be certain what its origin was. But tax experts cited by the Times speculated that it was a carryover from a huge loss of
nine hundred and sixteen million dollars, which Trump reported on his
1995 return, and which Trump may have relied on for many years to
minimize his tax bill or even wipe it out.
If the Trump Administration were serious about cleaning up the tax code
and eliminating costly loopholes, the treatment of the real-estate
industry would be an obvious place to start. But instead of tackling
this issue head-on, the nine-page outline of the tax plan released this
week speaks in generalities. “Special tax regimes exist to govern the
tax treatment of certain industries and sectors,” it reads.
“The framework will modernize these rules to ensure that the tax code
better reflects economic reality and that such rules provide little
opportunity for tax avoidance.” By the time the real-estate industry’s
lobbyists have finished with the Republican-run committees on Capitol
Hill that will actually write the tax legislation, this weak language is
likely to be watered down to nothing. And if they have any trouble
persuading lawmakers to preserve the favorable treatment of developers
like Trump, they’ll know where to turn: the Oval Office.