New York Times
October 4, 2018
By Lily Batchelder
We always knew President Trump was being misleading when he portrayed himself as a self- made man. But until Tuesday’s bombshell Times story, (https://goo.gl/45xhKJ) we did not know the breathtaking scale of the deception, or the extent to which his wealth was built on tax evasion.
This raises two questions. First, what can and should tax authorities do about the specific allegations of tax evasion and fraud by the Trump family detailed in the article? Second, what can lawmakers do to ensure that those who inherit extraordinary sums are paying their fair share?
While the statute of limitations has already passed for many of the alleged violations, the Trump family still can be pursued for civil tax fraud. This could result in family members owing back taxes, interest and penalties. New York State and New York City have already announced they will investigate. The Internal Revenue Service and the Department of Justice should, too — potentially by appointing a special counsel.
These agencies should not just look at the estate tax, but also at whether the Trump family committed income tax fraud. For example, did the president and his siblings claim the properties they inherited had a different — and much higher — value for income tax purposes than the lowball valuations claimed for the estate tax?
But even if the tax authorities cannot make the Trumps pay the taxes they evaded because of the time elapsed, the article raises a much broader issue: People who live off inheritances pay tax at much lower rates than people who earn their income through good, old-fashioned hard work. In 2009, for example, the average federal tax rate on income from work and savings was about 18 percent, compared with 4 percent for inherited income. The Trumps are an extreme example of a more general problem.
The tax advantages for heirs are partly due to fundamental problems in the law. Income from wealth is taxed very lightly and sometimes not at all. Moreover, our income and payroll taxes allow heirs to exclude everything they inherit from their tax returns, no matter how vast. The estate and gift taxes were meant to partly address this omission, but they have been cut relentlessly over time, falling from 2.6 percent of federal revenues in 1972 to less than 1 percent today, even while the share of wealth and income held by those at the very top soared.
Just last December, the president and Republicans in Congress doubled the estate tax exemption from $11.2 million to $22.4 million per couple. It now affects less than one in 1,000 estates.
The estate tax is also riddled with loopholes, which the 2017 law did nothing to address. For example, the Times article details how the Trumps used valuation discounts and something called a grantor-retained annuity trust to sharply reduce their gift and estate tax bill. The Obama administration proposed regulations to address abuses of valuation discounts, and legislation to address abuses of grantor-retained annuity trusts. Unsurprisingly, the Trump administration quickly withdrew both proposals.
Wealthy heirs also profit from another massive tax benefit, called stepped-up basis, also known as the “trust fund loophole.” It completely forgives the capital gains taxes that would be due on appreciated assets when they are bequeathed. President Trump also failed to re-up an Obama proposal to repeal stepped-up basis. The Obama proposal would have raised almost $250 billion over 10 years, 99 percent of which would come from the top 1 percent.
Congress should adopt these proposals. It should also increase the estate tax or replace it with a direct tax on inherited income . But the Trump family’s games further illustrate the blunt effect of legal changes if the law isn’t effectively and fairly enforced.
A vast majority of Americans can’t and don’t evade taxes. They earn their income from wages, which are subject to tax withholding. The I.R.S. collects 99 percent of taxes due on wage and salary income.
But the wealthy — and especially heirs — face a much different tax planning landscape. They earn most of their income from investments, which often are not subject to withholding or even information reporting. Many, like the Trumps, use webs of partnerships that make assets extremely difficult to trace.
The only way to catch most tax evasion by wealthy heirs is by methodically piecing through their schemes. The Times article demonstrates that this can be done effectively with sufficient time and resources. Each dollar spent on tax enforcement raises $18 in revenue. What we need is political will. Congress should be reinvesting in tax enforcement, not cutting the I.R.S. enforcement staff by 28 percent, as it has done in recent years.
Mr. Trump inherited an empire built on tax evasion. Perhaps we cannot recoup all the taxes he and his family owed. But we can use their example as a call to restructure our tax system so it taxes people who work for their money less heavily — not more — than those born with a golden spoon in their mouth.
(Lily Batchelder, a professor of law at the New York University School of Law, was majority chief tax counsel for the Senate Finance Committee from 2010 to 2014.)