Taxes are complicated.
How’s that for an understatement?
With The New York Times’ assumptions about Trump’s tax liability, the parties have flipped their 2012 positions. Mitt Romney’s infamous “47 percent” remark — empirically true — was met with scorn in the last election cycle. Democrats pounced with arguments that many Americans pay other taxes, whether on property, purchases, or payroll. Again, their point was empirically true.
Now, like football teams switching endzones at the end of a quarter, Democrats are attacking Trump based upon conjecture by the Times that he might have paid no federal income taxes for years. Republicans and the Trump organization respond that they have paid millions in taxes, be they levied on purchases, payroll, or property.
What a difference four years make.
But this battle shows two things. First, the pursuit of political advantage knows no bounds; nuance and consistency be damned. Second, incredibly complex problems — like the byzantine tax code — need a lot of work to solve, work not helped by shallow understanding and shouting matches. Even the vocabulary used to describe taxes degrades the debate.
For example, people are quick to charge Trump with using “loopholes” to avoid taxes. Yet the word “loophole” carries connotations of unintentionality. The fact is “Net Operating Loss Carryforwards” — the tax provision he used — are very much an intentional part of the tax code, and a reasonable one at that.
Look back at last winter. By all accounts, Maine’s ski mountains had a terrible season; it isn’t a stretch to assume they operated in the red. And if the snow gods smile this coming winter, they will hopefully make money. Yet they will pay little to no income tax. Why? Because they can offset this year’s profits with last year’s losses. “NOL” carryforwards recognize business can be cyclical and allow companies — including small, local businesses — to make up lost ground from years past before getting whacked with a tax bill.
And when the taxman cometh, the business will face a question laced with more poor word choice: are they paying their “fair share?” Politically, it is a great question; a desire for fairness is deeply ingrained in the American character. But conveniently missing from “fair share” demands are quantifiable numbers. How much tax is fair? 10 percent? 30 percent? 70 percent? From each according to their ability?
Or we hear calls to raise income tax rates on “the wealthy.” Wealth and income are certainly related, but they are two distinct things. A widow receiving $20,000 from Social Security who owns her home outright is “wealthier” than the 23-year-old engineer earning $80,000 and carrying student loans after graduating from the University of Maine. But the engineer will almost certainly have a higher tax bill.
So taxes are complicated. And The New York Times’ conjecture — with attempts by partisans to declare it fact — inflames the situation. In reality, a different provision of the tax code requires debt forgiveness count as “income.” Since the loss on Trump’s state tax return corresponds with the well-publicized collapse of his casinos, the simplest explanation is a later year’s return would show hundreds of millions of “income” as investors wrote off the money they were owed. That explanation is also a guess, but it has the benefit of consistency with other facts.
But so what? Arguments about the legal use — whether by Trump or Clinton or anyone else — of the current tax code obfuscates the real issue: our taxes are too complicated and reform is desperately needed. A new system will hinge on details, definitions, and distinctions derived from choices we make. We can tax productivity, sending the government a piece of your income earned from working or creating new ventures. How much of your effort is fair to dedicate to the public treasury?
Or we can tax consumption, focusing on movement of goods and services in the economy. Buying gas? A movie ticket? A yacht? Importing automobiles? Then you’re taxed or tariffed. Sounds fair, since your bill is inextricably tied to your ability to pay. Or we can tax wealth, levied on owning things regardless of your ability to pay — think property taxes. The more you have, the more you are taxed. Is that fair?
There are no easy or correct answers to those questions. And it isn’t as simple as a 30 second commercial or a front page “exposé” makes it out to be. Taxes are complicated. To make them simpler, we will need a precise vocabulary and serious people willing to make hard choices.
With our options in November, what could go wrong?