There is no smoking gun here, nothing that will finally ‘get Trump.’
There is no smoking gun here, nothing that will finally ‘get Trump.’
A s expected, the House Ways and Means Committee Democrats used their final days in the majority to release six years of tax returns connected to former president Donald Trump. This is an unprecedented action, one that was condemned by committee Republicans, and rightly so –this is banana-republic stuff. Committee chairman Richard Neal (D., Mass.) sounded a note of reluctance in his statement, putting most of the blame on the IRS for not auditing Trump enough while he was president. Leaking a tax return is a felony; regardless of the procedural hoops Democrats jumped through to get these returns out there, they’re now as public as they would have been if they’d been leaked, and the committee effectively forcing the leak creates a very bad precedent (can we see Hunter Biden’s tax returns next?).
I’ve been asked to take a look at the batch of returns to see if I could find anything interesting. Besides being a career tax-policy advocate, I’m also an IRS Enrolled Agent who has prepared taxes for businesses and individuals in the D.C. area for two decades. I will admit I have never seen a tax situation this complicated, but also this overblown by the chattering class. A tax return is only as good as what went into it — to show fraud, you need a full audit, not just a tax return. It also doesn’t show net worth, just tax income or loss in a given year.
Tax returns are supposed to be secret, and revealed only voluntarily. Reading tax returns forcibly extracted from any taxpayer made me feel dirty, and a little sad for the integrity of the tax system going forward. But there is no smoking gun here, nothing that will finally “get Trump.” Nonetheless, below is a report of what I found.
Trump has arranged his business affairs in an extraordinarily complex way. There are dozens of individual ventures, each organized as its own limited liability company (LLC) — think the old Trump hotel in D.C., each Trump golf course, etc. An LLC is a disregarded entity that flows profit or loss into other entities. In the case of Trump’s LLCs, they pass through their profit or loss into a handful of other LLCs, partnerships, and Subchapter S corporations that act as holding companies. The ultimate partner and shareholder of these holding company entities is Trump himself. In addition to this Russian doll of LLCs into partnerships into S-corporations into Trump’s personal return, Trump reports other business activities directly on his personal tax return as a sole proprietor or a single-member LLC.
The important thing to remember is that all this passing through of profit or loss, no matter how many entities are involved, ultimately lands on Donald Trump’s personal tax return, IRS Form 1040. Once there, the business profits and losses are subject to all sorts of rules most taxpayers never have to think about, including: the alternative minimum tax (AMT), at least before the Tax Cuts and Jobs Act largely repealed it in 2018; passive loss and at-risk rules; business tax credits, etc.
All of this is put through the meat grinder of a series of tax returns, which together very easily add up to over 1,000 pages of annual filed tax returns (note that this does not even include the small LLCs owned by the holding company partnerships and S-corps). But what’s important to keep in mind is that just like your and my comparatively simple 1040s, even a million pages of tax returns ultimately must be attached to a taxpayer, in this case Trump.
So what does all this tell us? Was Trump getting away with paying no taxes? As he might say, that’s fake news.
From the years 2015 through 2020, Trump paid federal profit and “other” (e.g. self-employment, household employer, etc.) taxes every single year. The best indicator of tax liability for a taxpayer is the “total tax” line, which accounts for both the federal income tax and all the things that proxy for federal income tax on a 1040.
In the years released, Trump had a cumulative “total tax” of $4.4 million. This ranged from a low of $285,000 in 2017 to a high of $2.1 million in 2018. Again, he had a total tax liability every single year.
During this same period, Trump reported a negative adjusted gross income (AGI) a majority of the years. AGI is the best measurement of profit when evaluating a taxpayer — it’s the denominator to the “total tax” numerator.
Trump reported negative AGI of over $30 million in two of the six years. He had a banner year profit of $24 million in 2018, but in the aggregate his profit was negative. What could explain that? Again, the dozens of LLCs that pass through to the handful of holding companies that flow through to Trump’s tax return were all different. Some were very profitable, and some had a lot of losses. Since Trump ultimately owns the entire portfolio of tax returns, the aggregate profit and loss flowed through to him. This is clearly a man who likes to create new ventures, maybe make a profit, and move on to others.
What’s important to note is that even in years where Trump had massive negative AGI numbers, he still had a total tax liability. For example, in 2016 his AGI was negative $32.4 million, but his total tax that year was over $600,000. How is that possible? That year, he owed only $750 in federal income tax proper, but he also owed $439,000 in self-employment tax, $45,000 in household employer or “nanny” tax, and $130,000 in Obamacare Medicare tax. All of these add up to his “total tax” that year.
I don’t know about you, but when I tell my clients they have to write a big check to the IRS with their 1040 filing, they rightly consider the whole thing to be income tax paid. They don’t care if Congress has hidden the ball by putting some of the tax into self-employment tax, and some into Obamacare taxes, and some into nanny tax. It’s all income tax, and money out of their pocket.
In a more flush year like 2018, Trump finally got past those LLC losses and made a hefty profit of over $24 million in AGI. That year, his total tax was over $2 million. That seems a little low, until you dig in some more and find that his many businesses were eligible for tax credits created by the Congress when they wrote the tax law.
Over the entire six-year window, Trump had aggregate negative AGI of $52 million and aggregate total tax of $4.4 million. He paid plenty in taxes even though he lost money.
In short, I don’t think there’s a lot here. We have a man who has spent a career obsessively creating dozens of businesses, probably hundreds over his lifetime. Many of these have lost money, which of course cancels out those that have made a profit. When it all nets out, the ultimate owner pays all the tax legally owed. Should he pay more? Only if you believe someone should not be able to let his business losses offset his business profits, which is grossly unfair. If the business losses were fraudulent for some reason, that’s not clear from these tax returns — each LLC would have to be separately audited and its books examined. But today’s Trump tax-return dump was a lot of buildup for not a lot of interesting output.