America badly needs a tax code that is simpler and much more difficult to manipulate. Done the right way, tax reform could also be a boon for the economy. It could create incentives for companies to invest and expand instead of hiding income overseas.
A weekend New York Times report that Donald Trump declared such a large net operating loss — $916 million — on business dealings in 1995 that he may not have had to pay federal income taxes for up to 18 years quickly became grist for the political mill. It raised legitimate new questions about the Republican presidential nominee’s refusal to disclose more recent tax returns and prompted new attacks on his honesty and character as well as defenses of his business acumen.
But once this revelation is stripped of its political context, here’s what it should be: a wake-up call to Americans about the awfulness of the U.S. tax code.
David Cay Johnston won a 2001 Pulitzer Prize for his reporting on the many ways the Internal Revenue Service is gamed by corporations and individuals. In his 2005 book, “Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich — and Cheat Everybody Else,” Johnston showed that the tax the very wealthy pay is a function of the skill of their tax attorneys.
In the book’s stunning first chapter, Johnston profiles Jonathan Blattmachr, a college math major turned New York City tax lawyer who became “a prolific creator of perfectly legal ways for wealthy Americans to escape taxes on their fortunes” — someone whose client list “reads like the Forbes 400.” The first anecdote involves a Blattmachr specialty: manipulating a charitable trust so Bill Gates would be allowed to make hundreds of millions of dollars with a stock sale and not only avoid capital gains taxes but get a $6 million income tax deduction. It’s not known whether Gates used the strategy, but with many of Blattmachr’s clients, the scheme “sold like a treasure map where X marks the tax-free spot.”
It is such tricks that Trump probably used with his 1995 return, Johnston wrote Monday in the Daily Beast. The short version of the likely scheme: His lawyers figured out how to claim about $1 billion in net operating losses from business debacles in real estate and casinos and a failed airline, then shifted the cost of much of those losses onto investors and banks, all while retaining $916 million in net operating losses to defray future income taxes.
America badly needs a tax code that is simpler and much more difficult to manipulate, not one where the 400 richest Americans pay a smaller effective income tax than those making $75,000. Until Blattmachr-style schemes are far less common, not only will the very rich continue to not pay their fair share of taxes, the seething anger with the “1 percenters” that the Occupy movement championed in 2011 will continue its spread into the middle class.
Done the right way, tax reform could also be a boon for the economy. It could create incentives for companies to invest and expand instead of hiding income overseas. If corporate subsidies and loopholes were reduced or eliminated, corporate tax rates could come down. If more services and products were taxed, rates could be brought down on all services and products.
The 2016 election will be remembered as unsettling and troubling. But if it yields broad awareness of the need to fix a broken tax code, that would be no small consolation.
— SAN DIEGO UNION-TRIBUNE