You have to give The New York Times credit. Their 13,000-word expose on the inner workings of the Trump family business is fascinating. How much of it is true is a different question. And the boundary between bias and objectivity is unclear; much of the piece uses words with loaded connotations, such as describing certain activities as tax “dodges.”
The reason for this language is due to the inherent murkiness of tax laws. “The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.” That maxim, from a 1935 Supreme Court opinion, has come to stand for a simple proposition: legally minimizing or avoiding taxes is fine; illegally evading them is not.
So the question naturally arises: What tax choices that reduce taxes paid are legal?
The reason the Times was able to present a compelling story is because taxes are complicated. There seems to be a simple subtext underlying the narrative. The Trumps had a lot of big numbers and confusing acronyms flying about, so there must be something nefarious underneath.
That is an understandable gut reaction. Yet we think with our heads, so it requires a bit more consideration. And the simple reality is that our tax laws at the federal level are a byzantine mess. In fact, the Taxpayer Advocate — an officer of the IRS — has told Congress the complexity of the tax code is the biggest challenge facing taxpayers.
That intricacy is exactly why — assuming the report is accurate — President Donald Trump’s father was able to make many of the moves outlined in the article. Whether you think him shrewd or a scofflaw, a major reason his tax positions were not challenged is because the IRS enforces laws with few bright lines and miles of gray.
The report also highlights another reality. People with resources can often figure out ways to legally minimize their tax bill. That has always been true. For all the talk about tax rates in the halcyon days of the 1960s, 1970s and early 1980s — the top marginal rate in 1980 under President Jimmy Carter was 70 percent — top income earners have always paid about the same effective rate, then and now. In 1980, “1 percenters” paid 33.1 percent of their income to the U.S. Treasury. In 2014 under President Barack Obama, with a top rate of 39.5 percent, they paid 33.6 percent of their income in taxes.
With taxes, there is always more to say. But the easiest way to prevent complicated maneuvers from people exercising their legal right to minimize their tax bill is to make the law simple. Like everything in life, the more moving parts, the more likely something will break or get missed. You will never pass a lawyer-proof law, but Congress could at least give it a fighting chance.
The same analysis applies in Augusta. The next governor will have a unique opportunity. Gov. Paul LePage is leaving over $270 million in the rainy day fund and revenues coming in above projections.
It is not a luxury which was afforded to LePage; the waning days of the Baldacci administration, coupled with the Great Recession, left the state in precarious financial position and facing a crisis upon his election. And, to be fair, Gov. John Baldacci was dealt a similar hand as well. His tenure began with the economy reeling from 9/11 and less than $20 million in the rainy day fund.
So, whoever our next governor is will not be faced with bailing out a sinking fiscal ship. Instead, they have the opportunity to take a real look at Maine’s tax code. It is a unique opportunity to make things simpler, such as eliminating the income tax — which only hits Maine residents — and adding a broader consumption tax, which all our tourists and part-time residents pay. Sales taxes are also much harder to avoid.
“Everyone can do their own taxes, know what they owe, and pay them on time” isn’t quite as gripping a headline, but it is probably the right public policy. That’s why I’m worried it will probably never get done.