Trump and the truth about taxes

Some details of Trump’s tax returns leaked recently, which seemed to suggest that he hasn’t paid any taxes for ten years due to the fact he’s lost over a billion dollars over that period. So doesn’t look like he’s such a great businessman then. Trump (America’s court jester in chief) then preposterously claimed that this was a deliberate strategy to avoid payment of taxes (essentially all but admitting to tax fraud). However it does highlight a number of important issues with regard to tax and the wealthy.

Firstly it shows that most Americans, in particular republicans, don’t understand how marginal tax rates work. That even if the 70% Alexandria Ocasio-Cortez proposes was applied, it would only apply to top earners and only the portion of their income in the tens of millions. In truth they’d be paying closer to 20-35% on their overall income, particularly when you consider the various deductions that would apply. Which is about what the average American pays in tax, so it would more be about levelling the playing field. After all Warren Buffet pay less tax (as a proportion of their income) than his secretary.

An example of a marginal tax in action, this person might be paying a maximum rate of 50%, but only pays 32% overall

But such is the naivety of many Americans that Trump can make a logical fallacy and many fall for it. What he’s essentially saying is that if you’ve got a 100 dollars and the government is going to take away half of it, your best strategy would be to not only burn the $100, but burn another $100 you’d borrowed from somebody else….whereas if you just paid the tax you keep $50, probably more like $75 once you account for the effect of marginal rates.

Another cause for concern is that Trump’s businesses just happen to involve several industries (construction, hotels and casino’s) where its remarkably easy to fiddle ones taxes. Which probably explains why he’s going to such extraordinary lengths to prevent any probes.

A building site for example will be a hive of activity, with hundreds of contractors and sub-contractors coming and going, as well as a steady stream of trucks pulling in to making deliveries. Its all too easy for a developer to simply award a contract to someone for work that never gets done or award a contract at a vastly over inflated cost (e.g. they claim it took a hundred guys a month, when it only took a few dozen a week’s work). Then the developer and contractor split the difference (with the developer writing it off as a business expense). Or buying your concrete and other supplies at inflated prices (or simply inflating the amount used). And its worth noting that some of Trump’s suppliers and contractors were mob connected firms.

As for hotels and casino’s, there’s all sorts of ways you can fiddle the books to milk the joint dry, without the IRS or the investors getting wise. You could for example just order lots of booze and gourmet food in the front door on the company books and then sell it out the back door for cash in hand. Employee expenses can also be fiddled. And there is of course the infamous casino skim racket, which I’d say was almost certainly in play in Trump’s Atlantic city casino.

So there are many good reasons to go digging into Trump’s tax affairs. Not only could this see him in a cell wearing a number, but it could lead to a number of mobsters being brought to justice too. Keep in mind this isn’t a victimless crime, his investors, employees and Atlantic city all got shafted. And the mob might well have been using this operation to launder drug money (as that’s often the whole point of such rackets).

Which also btw leads one to be suspicious of his recent tariff policy. Suddenly imposing tariffs and sending the markets into freefall, silly idea right? Well not if you’ve got connections with some boiler room hedge funds, who know this is coming and position themselves to take advantage of the drop in advance. Its entirely possible that Trump is deliberately sending out messages on twitter to manipulate markets. Of course, the danger is that the Chinese, who aren’t in on the scam, retaliate and they do have a nuclear option, start selling off US bonds.

But I digress. Certainly however, Trump’s statements on tax do show the limitations of tax policy. Those on the left will often cite “tax the rich” as their go too solution to everything. But as Trump shows there’s all sorts of ways the rich can fiddle their taxes. Certainly yes there are good reasons why the rich should pay more in taxes. They have more disposable income. Asking them to pay a few grand extra a year amounts to a choice between the gold and the silver trim package for their super yacht. While asking a low income family to pay a few quid extra a month amounts to a choice between feeding the kids or heating the home in winter. So its only fair higher earners pay more.

But, even if we ignore the various tax fiddling options, the numbers just don’t add up, something I’ve discussed before. The rich are asset rich, but don’t necessarily earn as much in terms of taxable income as you think. Just because a billionaire is worth several billion doesn’t mean he makes that much money every year. In truth he might only make a few million. And much of that will be speculative wealth (e.g. the value of the shares he owns goes up, but of course if he sold the shares all at once they’d lose value). And again, a few fiddles can cut that down even further.

Hence even if you applied the 70% tax Alexandria Ocasio-Cortez is calling for, you’re not going to pull in nearly as much money as you’d think. At best you’d be able to cut some of America’s deficit spending (or spend some money on climate change prevention). Or here in the UK you’d be able to reign in some of the worse of Tory austerity measures. Which would be a good idea, but not quite the effect many on the hard left seem to think it would have.

And, as noted, the big problem with the rich and taxes is just getting them to pay any in the first place. Personally, I’d settle for getting to just pay what they owe. Hence why I’d argue the focus should be on cracking down on aggressive tax avoidance and reigning in tax havens. But of course that requires strong international institutions (such as the EU), which some left wing populist oppose.

In truth however, if you want to increase tax revenue, you’ve really got to do it for everyone, although obviously the rich will get hit the hardest by such a rise. Putting them up on as much items as possible is a better strategy as this spreads out the impact and makes it harder to fiddle the system and avoid taxes. This is what the Scandinavians do. They also often charge a wealth tax, which means you pay tax on your net worth (typically about 0.1-1% per year) as well as property and land value taxes. But again, such taxes hit everybody. And putting taxes up for middle income voters (who tend to be the ones who decide elections) is easier said than done.

Hence the trick with tax rises is selling them properly. For example, the SNP recently put up taxes here in Scotland, with all tax bands rising (other than the very lowest bands), with the highest rises effecting the highest earners. This was sold on the back of avoiding the sort of austerity measures being applied down in England. Which I thought was fair enough. And if polls are to be believed, it seems most in Scotland agreed. By contrast in France, Marcon has gotten himself in all sorts of trouble with his tax rises largely because he didn’t sell them properly and introduced them too quickly.

This is the risk the left run if they plan on selling “tax the rich” as the snake oil solution which will cure everything. It will raise some money yes. It will help restore some equality to the system yes. But its not going to magically solve everything overnight. And it might well produce a populist backlash, that the right will exploit.