The art of getting rich on Daddy’s deals
Th?e New York Times investigation of how Donald Trump built his fortune is deeply revealing on many levels. It also takes some work to get through, so here's a summary of what I found most important in the piece.
As you'll see, although these revelations change nothing today, they shine a clear light on the way forward against the corrupt plutocracy that increasingly defines the relationship between American wealth and taxes.
The bottom line of the piece is that Trump lied about how he gained his wealth. To this day, he and his aides claim that his father, Fred Trump, lent him $1 million and that it was repaid with interest. In fact, Trump “received the equivalent today of at least $413 million from his father's real estate empire”, according to the Times report.
Had he merely invested his father's gifts in a passive S&P index fund, it would be worth $2 billion today (note that Bloomberg News estimates Trump's wealth at $2.8 billion).
Instead, he constantly made reckless investments that required his father to bail him out. Trump is an unparalleled master at shaping his image.
But the story told by the Times is one of an inept real estate agent. It is less that Trump was born on third base but claims he hit a triple, and more that he kept getting tagged off the bag but got his father to pay the umps to let him stay on base.
Here are some lessons I take from the piece.
The tax code privileges wealth over wages. There is a huge inequity built into our tax code: Wealth, which is far more concentrated at the top of the scale than income, is both more lightly taxed and easier to hide than wage-based income.
Moreover, virtually all the games the Trump family played in avoiding (legal) and evading (not legal) wealth taxes remain in place today.
For example, The New York Times points out that the Trumps were avoiding a 55 per cent estate tax rate.
Today, that rate is down to 40 per cent. More important, the Republican tax Bill doubled the amount of estate wealth that is exempt from the tax to $22 million for couples, which is one big reason the actual rate faced by the estate-based wealth transferred to heirs is well less than half the statutory rate.
Thus, no matter how much estate-based wealth appreciates over time, it can largely escape income taxation, while paycheques are regularly taxed at higher rates.
Similar privileging extends to gains from wealth that are “realised”, such as the sale of stocks.
Capital gains face a top rate of about 24 per cent compared with the top income tax rate of about 40 per cent.
There is an even bigger loophole for heirs who are bequeathed appreciated assets from their relatives.
Instead of being taxed on the increased value of the underlying asset, say a stock that went from being worth $100 to $1,000, they get the $1,000 tax-free. No income tax is due on the $900 gain, either by the estate or the heir.
Meanwhile, a working stiff who gets a couple of extra bucks in her paycheque must pay payroll and, depending on her household income, income taxes on her raise.
Too much inherited wealth escapes taxation. Even those lower tax rates on wealth mean little if they can be avoided by using methods the Trumps repeatedly exploited, according to the New York Times report.
Their basic play was to massively lowball valuations to the IRS on taxed income, the report said, and equally aggressively inflate costs they could deduct.
For example, the Times found a case in which the Trumps claimed one of their properties was “worth less than nothing — negative $5.9 million, to be exact”. That same year, city tax assessors valued the same property at $38 million.
To avoid inheritance taxes on Fred Trump's income, the Trumps set up a scam wherein they padded the prices of materials and equipment they bought for their buildings, writing off the phoney, inflated costs and pocketing the difference.
To add insult to injury, based on the inflated invoices, they got the city to approve rent increases for their tenants (they needed city approval because Fred Trump consistently took advantage of government subsidies to finance his projects). The IRS was far too easy on the Trumps.
And I fear it is on their contemporaries today. How is it that the IRS played along with all these tactics, many of which were clearly fraudulent?
For example, when Donald Trump was close to defaulting on a loan to one of his casino properties in 1990, his father bought $3.35 million worth of chips from the casino without placing any bets.
Such a transaction was clearly an illegal loan, but the fine imposed by the IRS was only $65,000.
Similarly, in another case of phoney valuation, the Trumps claimed the value of one of their buildings fell by more than 80 per cent in less than three weeks, from $17.1 million down to $2.9 million.
The claim, the Times said, “slid past the IRS. with barely a protest. An auditor insisted the value should be increased by $100,000, to $3 million”.
As I will underscore below, one of the more powerful, forward-looking messages from this work is that this lack of enforcement of tax law can be and must be changed. Trump is really, really good at fooling many of the people much of the time.
As willing as the IRS was to overlook such fraud, the public and the media were even more willing to create the myth of Donald Trump as a maverick whose bold business acumen took his father's little outer-borough operation into Manhattan.
In fact, when Trump crossed the river into the big city, his father hugely turned up the already free-flowing spigot of loans and gifts.
More than anything else I have read, the article clearly reveals Trump's talents have never been at all substantive in terms of business, finance or building. Instead, they have been to masterfully convince anyone around him of skills he does not possess.
This changes nothing ... for now. Had these revelations been levied against a normal president in normal times, they would lead to hearings and investigations, if not impeachment (“her e-mails!”).
But this White House swatted away this meticulously reported 14,000-word exposé like a bug. Fake news ... hit job ... onto the next bit of chaos.
But that is for now. Progressives have long argued for closing these loopholes and ending such favourable treatment of income from wealth.
Tax scholar Lily Batchelder reminds us: “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 IRS enforcement staff by 28 per cent, as it has done in recent years.”
This is potentially a powerful argument. Partisans fight intensely about whether taxes should be raised or lowered, but this is not that argument.
It is instead an argument to block the gaming of the tax code by lawyered-up tax avoiders, to collect what is owed, and, in so doing, to fight back against the corrupt plutocracy that we saw in the Paul Manafort trial and here again in the dealings of the President. That is not a partisan fight. It is a call for basic fairness, one I am confident will resonate with everyone who's not ripping off the IRS the way the Trumps apparently did.
And, trust me, there are a lot more of us than them.
• Jared Bernstein, a former chief economist to US Vice-President Joe Biden, is a senior fellow at the Centre on Budget and Policy Priorities and author of The Reconnection Agenda: Reuniting Growth and Prosperity