The late real estate magnate Leona Helmsley’s infamous assertion that paying taxes is for “little people” was vividly illustrated in late September by a bombshell report from the New York Times — which, after carefully and thoroughly examining President Donald Trump’s tax information, found that he paid no federal income taxes in ten of 15 years that preceded his election in 2016. The fact that Trump, a self-described billionaire, was paying fewer federal income taxes, percentage-wise, than the average schoolteacher or firefighter demonstrates that Helmsley spoke a painful truth. Journalist Derek Thompson, in an article published in The Atlantic on October 5, offers some analysis of the Times’ report, and argues that there are “three somewhat overlapping interpretations” of Trump’s tax history: “incompetence, malfeasance and criminality.”
As for the “criminality” part, some pundits have argued that Trump, quite possibly, did nothing illegal from a tax standpoint — that, like other wealthy Americans, he simply had first-rate accountants who know how to legally game the system and manipulate the U.S. tax code for the benefit of the ultra-rich. But those pundits have also stressed that even if Trump acted legally, the fact that a billionaire paid zero federal income taxes during ten years of a 15-year period is appalling.
Thompson, who interviewed several tax experts for his article, breaks the piece down into three sections — one for each “interpretation” — and labels them Explanation 1: Trump’s Businesses Are Doing Terribly, Explanation 2: Extremely Questionable Tax Maneuvering, and Explanation 3: A Mystery Only Prosecutors Can Unwind.
For Explanation 1, Thompson quotes Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center — and according to Rosenthal, “His losses are staggering, especially for somebody in real estate, for whom the tax code is very generous. In part, this reflects the changing nature of Trump’s business operations. He used to be a pure real estate mogul. But in the last 15 years, he’s made more money as a television star who licenses his name to various products. He’s been incredibly unsuccessful at owning and operating stuff in that time.”
For Explanation 2: Extremely Questionable Tax Maneuvering, Thompson quotes Ari Glogower, a tax policy expert who teaches at Ohio State University. Glogower told Thompson, “The tax law is clear that you don’t get to claim a business deduction for expenses that are fundamentally personal in nature. It’s the same principle that says you can’t deduct fancy suits just because you work in a nice office.”
It should be stressed that in the U.S., there is criminal tax law and civil tax law. Income tax evasion, which is what sent Leona Helmsley to federal prison, is a criminal matter — whereas an honest mistake on a tax return is a civil matter and can result in fines and penalties but not criminal prosecution. If the Internal Revenue Service conducts an audit and an IRS agent decides that some of the deductions claimed on a return are not tax-deductible, the IRS doesn’t consider that a criminal offense but could slam the taxpayer with some stiff payments.
Some of the deductions that Trump claimed, according to the New York Times, range from $70,000 for hair stylists to “consulting fees” paid to his daughter, Ivanka Trump (now a White House senior adviser).
For Explanation 3: A Mystery Only Prosecutors Can Unwind, Thompson notes Trump’s reputation for being “the King of Debt” and points out that he “is pouring a mysteriously large amount of money into opaque businesses suffering mysteriously high losses.”
Thompson explains, “None of the tax experts I talked with said, ‘Yep, that’s clearly an illegal scheme.’ But several told me that when companies, such as golf courses or restaurants, that seem to be losing lots of money nevertheless continue in operation for many years, prosecutors might become interested in investigating money laundering.”
According to Georgetown University tax professor Brian Galle, Thompson’s three scenarios are not mutually exclusive. Galle told Thompson, “There is a relationship between your interpretations one, two and three. If you’re a naturally successful businessperson, there is less pressure to maintain your wealth with tax-evasive maneuvers, or to engage in full-fledged money laundering.”