By Richard Rubin
President Trump's apparently minuscule tax payments are pumping new energy into Democrats' plans to raise taxes on rich people and beef up the Internal Revenue Service.
But raising tax rates wouldn't necessarily make the president or others in similar situations pay more, because he reportedly claimed unusually large business losses to lower his taxable income. And Mr. Trump's tax situation doesn't automatically yield a list of tax breaks to be eliminated, because he seems to be making aggressive use of common deductions that help many businesses.
Mr. Trump paid $750 in federal income taxes in 2016 and 2017 and no taxes for many other recent years, according to a report by the New York Times. That result stemmed from money-losing businesses, various tax credits and questionable deductions, according to the Times. The president has derided the report as fake news and says he has paid millions of dollars in taxes, but he has provided no documentation or details. The Times report couldn't be independently verified, and Republicans are seeking government investigations into the disclosure.
The report put a renewed spotlight and a face on tax avoidance by wealthy people, a problem that can be addressed both by changing the law and by improving enforcement. Former Vice President Joe Biden cited Mr. Trump's tax payments during Tuesday's presidential debate as a reason why he's trying to reverse some of the 2017 tax cuts.
" Donald Trump is kind of the new poster child for the need to invest in an IRS that's going to be capable of capturing high-wealth evasion," said Natasha Sarin, a University of Pennsylvania professor who has been pushing for more IRS funding.
While Mr. Trump's taxes might provoke outrage -- how can someone who appears so wealthy pay so little? -- attempting to prevent such outcomes without causing collateral damage can be tricky.
Some features of the tax code that drove down the president's tax obligations exist for valid reasons. For example, the law lets businesses use losses from some years to offset profits in other years so that tax payments are smoothed across the ups and downs of the business cycle.
"In tax policy, there never is a silver bullet for any of this stuff," said Kyle Pomerleau of the center-right American Enterprise Institute. Greater enforcement would be a better approach than legal changes that sharply limit deductions for losses, he said. "That's just how an income tax works."
The rules for how and when those losses are used to lower tax bills could get new scrutiny, though. The 2017 tax law that Mr. Trump signed made it harder to use losses to offset past and current profits. But it also made it easier to carry losses forward to future years. The 2020 economic-relief law relaxed some of those restrictions in an attempt to aid businesses, and Democrats are already trying to put limits back in place.
Although Mr. Trump's businesses moved beyond real estate into celebrity branding, Democrats will also look at the industry where the president got his start.
There should be a "review of numerous special breaks for developers like Trump scattered throughout the tax code," said Rep. Lloyd Doggett (D., Texas), who also called for more resources for tax enforcement and scrutiny of each preference in the 2017 tax law.
Mr. Biden has proposed eliminating the ability of real-estate investors to exchange one property for another without incurring capital-gains taxes. And he has proposed taxing unrealized capital gains as income at death, which would limit the benefits of holding appreciated property. Democrats might also seek to limit rules that give real estate professionals more flexibility than other taxpayers in how they use their losses.
Part of the challenge is that Mr. Trump's extensive maneuvers to reduce his tax liability make him an outlier, said Steve Rosenthal, a senior fellow at the Tax Policy Center, a Washington group run by a former Obama administration official.
"Trump is just way out there, and I don't think our tax laws are that broken," he said.
The Trump revelations are also likely to spur Democrats to seek more money for the IRS, where audit rates dropped 40% from 2010 to 2018. Nonpartisan analysts, including the Congressional Budget Office, project that giving the IRS more funding and focusing enforcement on high-income households could generate money for the government.
Even if Mr. Trump presents an unusual combination of public prominence, multiple businesses and a lengthy audit, his circumstances suggest that there is revenue to be gained from more close looks at taxpayers with high incomes or significant business losses.
Charles Rossotti, a former IRS commissioner, advocates making sure the government has more information about business income so it can find noncompliant taxpayers.
"If you raise the rates, all that you do is make the people who are already paying pay more," he said. "I can't think of anything more unfair than that."
IRS funding declined in real terms for nearly a decade, due to a governmentwide austerity push that started after the 2010 election and continued with Republicans' desire to punish the agency for its scrutiny of some conservative nonprofit groups.
In a way, IRS investigation of Mr. Trump is evidence that the tax-enforcement system is working -- albeit very slowly. But to advocates of more and tougher enforcement, the pace of Mr. Trump's audit and the potential revenue at stake shows just how much the agency needs more resources.
"In a certain sense, this is what we want the IRS to do more of, and they're not able to do it," Ms. Sarin said.
For the IRS, it can be relatively cheap to audit wage-earners, business owners who omit income or low-income people claiming the earned-income tax credit. But challenging corporations and the superwealthy takes time, experienced professionals picking through complex transactions, a willingness to fight in the gray areas of the law and careful decisions about how much effort to spend on each case.
"This is people's broad introduction to the idea that tax law is not black and white," said Sam Brunson, a tax law professor at Loyola University in Chicago.
Write to Richard Rubin at richard.rubin@wsj.com
(END) Dow Jones Newswires
10-01-20 0911ET
