On the one hand, it would seem to be basic decency that a president, even if viewed as merely the chief executive of the federal government, as well as a major candidate for the job, disclose his tax returns, as is done since 1976. After all, he will have much power to influence the amount and uses of the taxes of his voters as well as of those who vote against him. Some humility is warranted.
On recent revelations concerning the former president’s taxes, see Richard Rubin, “Donald Trump Reported Little or No Income-Tax Liability for Several Years, Records Show,” Wall Street Journal, December 21, 2022; James Politi and Sujeet Indap, “Donald Trump’s Tax Records Show $53mn in Net Losses over Six-Year Span,” Financial Times, December 21, 2022; and Joint Committee on Taxation, “Report to the House Committee on Ways and Means Chairman Richard Neal”, December 15, 2022.
On the other hand, a president or presidential candidate would have credible reasons to object. Take the case of Mr. Trump. We can imagine him declaring during the 2016 electoral campaign:
The IRS, just as the government in general, already has too much power, as many ordinary Americans have experienced over the years. I intend to vigorously attack this problem. In this context, I believe it is very dangerous to grant the state apparatus the further power to disclose, or threaten to disclose, the tax return of any American—to “weaponize” tax returns, as so many state powers seem to be weaponized. Pressuring a candidate to the presidency to make his tax returns public would fuel the idea that individual privacy is secondary to state interests. As a consequence, I do not intend to make my tax returns public and I will resist any future attempts to force me to do so.
Many problems plague the current tax system. I leave it to my readers to determine if Trump could conceivably have added:
As Chief John Marshall once noted, “the power to tax is the power to destroy.” Economic theorists, notably from the Public Choice school, have pointed out and analyzed this danger. My honorable (and scholarly-minded) electors may want to read Geoffrey Brennan and James Buchanan’s The Power to Tax: Analytical Foundations of a Fiscal Constitution (Cambridge University Press, 1980; Liberty Fund, 2000).
Of course, Trump never said anything like that. And his “deplorable” supporters may be interested to know that their populist leader and adulated business genius declared $53 million in net losses over the 2015-2020 tax years and no taxable income tax during four of these six years.
Notwithstanding all that, authoritarian vindictiveness must be avoided. Anybody cognizant with Nobel economist Friedrich Hayek’s theory of law in a free society must be acutely aware that it would be a serious violation of the rule of law, which is based on equal and general laws targeting no particular individual, to adopt any special “law” against Mr. Trump.
READER COMMENTS
vince
Dec 22 2022 at 1:43pm
Congress can make it a law if they want a candidate to reveal his tax returns. Without the law, voters can decide whether to elect one who declines.
Tax returns for a businessman are only one version of income. I could own a corporation worth ten billion and it could have income of one billion. If it paid no dividends and paid me a salary of $50,000, my personal income tax return shows income of $50,000.
If I also owned a real estate partnership return I could report losses of a million as follows. Commercial real estate is owned outright and rented for two million at triple net–the tenant pays the property taxes, insurance, and maintenance. The partnership collects rents of two million but takes depreciation of three million. That’s a loss of one million even though it had cash flow of two million and the property appreciated in value. I pay no taxes and have a net operating loss that I can carry forward against future $50,000 salaries.
I haven’t looked closely at the House Committee report, but it appears that the losses are from … partnerships and net operating loss carryovers.
Craig
Dec 23 2022 at 9:50am
“Congress can make it a law if they want a candidate to reveal his tax returns.”
They could absolutely try and until they do its always difficult to predict the outcome, but one school of thought is Congress doesn’t have the constitutional authority to pass a statute of this sort because the qualifications to be President are spelled out in the Constitution itself, ie Congress can’t amend the Constitution by statute.
Naturally political parties could make disclosing tax returns a prerequisite to obtain the nomination.
vince
Dec 23 2022 at 1:55pm
The requirement for Financial Disclosures was an add on. Coincidentally, the House on Thursday passed a tax return requirement.
Craig
Dec 24 2022 at 1:05pm
And that statute could ultimately be passed and ultimately wind up never being challenged.
Vivian Darkbloom
Dec 26 2022 at 5:57am
“Tax returns for a businessman are only one version of income. I could own a corporation worth ten billion and it could have income of one billion. If it paid no dividends and paid me a salary of $50,000, my personal income tax return shows income of $50,000.”
That’s very bad tax planning. Besides, a salary of only $50K would be a red flag audit for social security and medicare tax underpayment. (One is navigating between Scylla and Charibdys as regards paying a too-low or too-high salary from a closely held corporation).
As for the rest, you ignore the passive activity loss (PAL) rules (see, IRC §469 )that limit the amount of loss deduction for rental real estate activities in the current year to $25K against non-passive income. (The rules phase this out completely when Modified Adjusted Gross Income exceeds $150K in the current year). These rules were introduced in the 1986 TRA which dramatically reduced the ability to use investment “tax shelters”. Also note that the $25K is not indexed for inflation, so that limit ain’t what it used to be in 1986.
Those PAL rules probably did not apply to Trump in the years prior to his Presidency as he likely had “material participation” in the partnerships in which he was a member. He had to transfer his interests to a blind trust during his Presidency, so it would have been impossible for him to be a material participant during those years, but he could rely on PAL and NOL carryovers.
If Trump were reporting large amounts of taxable income from his real estate operations, that would strike me as evidence of incompetence, not competence or honesty, per se.
vince
Dec 26 2022 at 3:50pm
“That’s very bad tax planning. ”
The example was about income tax returns as a measurement of income, not about tax planning.
“As for the rest, you ignore the passive activity loss (PAL) rules”
Hotels generally aren’t passive activities. And whether Trump put his assets in a blind trust is disputed.
It will be interesting to see what comes of the House report on his tax returns. Passive losses were one issue they raised.
Vivian Darkbloom
Dec 26 2022 at 4:52pm
“Hotels generally aren’t passive activities. ”
The whole point of the PAL loss rules is that a person who has limited participation in the affairs of the business (such as a limited partner in a real estate partnership) are deemed to be engaged in a passive activity.
“And whether Trump put his assets in a blind trust is disputed.”
It would be pretty tough to have “material participation” in a limited partnership (as defined in §469) when your other obligations include President of the United States”!
vince
Dec 26 2022 at 8:33pm
Are all the entities limited partnerships?
For purposes of the 500 hour material participation rules, you can elect to group activities. He likely meets a five year rule anyway.
Even if an activity is passive, upon disposition all losses are deductible.
Craig
Dec 27 2022 at 12:41pm
“Besides, a salary of only $50K would be a red flag audit for social security and medicare tax underpayment. ”
One typically can see this with an S-Corp because what some try to get away with is to pay themselves a below-market salary and then take the rest of the profit out as a dividend.
“Those PAL rules probably did not apply to Trump in the years prior to his Presidency as he likely had “material participation” in the partnerships in which he was a member. ”
To be honest I am surprised we are even asking the question with respect to Trump, individually.
vince
Dec 27 2022 at 1:14pm
“One typically can see this with an S-Corp because what some try to get away with is to pay themselves a below-market salary and then take the rest of the profit out as a dividend.”
Yes, the John Edwards loophole. My example didn’t specify an S corp.
With a C corp, it’s the opposite problem. Corporations would rather pay above-market salary to owners and benefit from the wage deduction. Dividends aren’t deductible–but they should be.
Vivian Darkbloom
Dec 27 2022 at 1:42pm
“To be honest I am surprised we are even asking the question with respect to Trump, individually.”
I’m not sure what your point is, but the question was raised with regard to Trump individually because the determination of whether there is material participation for purposes of the PAL rules is applied at the individual (partner) level.
robc
Dec 22 2022 at 3:24pm
I had three years (2016-2018) that I paid no income taxes due to NOL carryovers. It isn’t unusual at all.
Jim Glass
Dec 23 2022 at 1:54pm
Mmmm…
I’m imagining Trump addressing the nation and asking the voters to consider the wisdom of Marshall and Buchanan.
Ha! You’ve made my holidays!
Thanks. 🙂
Comments are closed.