Trump tax returns raise alarms about fairness of US tax code

A preliminary review of the thousands of pages of Donald Trump’s tax returns released by a key congressional committee on Friday confirms that the former president was using business losses in the tens of millions of dollars to reduce his annual tax liability, in some cases all the way down to zero. 

While one of Trump’s main businesses was found guilty of criminal tax fraud earlier this month, Trump himself has so far not been accused of doing anything illegal with his taxes and personal accounting.

But that’s raising more urgent questions about the fairness of the U.S. tax code and tax regulations, which number in the millions of words and in the case of Trump proved effectively unenforceable.

Advocates for tax reform say that a shift in mindset is needed, that a flawed conception of taxation as punitive and economically destructive is what allows for the sort of serial tax avoidance on display in the Trump tax returns.

“With the release of Donald Trump’s tax returns we have learned that he did not pay any federal income taxes [in some years],” Frank Clemente, director of tax advocacy group Americans for Tax Fairness, said in a statement to The Hill. 

Clemente said that Trump’s tax avoidance was made possible by “a loophole-ridden tax system in need of fundamental change.”

Trump on Friday touted his ability to use the tax code to his advantage, specifically praising his use of business losses to wipe out his own personal tax bill.

“The ‘Trump’ tax returns once again show how proudly successful I have been and how I have been able to use depreciation and various other tax deductions as an incentive for creating thousands of jobs and magnificent structures and enterprises,” Trump said in a statement.

In an apparent violation of IRS policy, which mandates that presidents receive regular audits, U.S. tax collectors were not auditing Trump on an annual basis, according to the House Ways and Means Committee report released last week.

The reason for that isn’t clear, but the complexity of Trump’s financial situation and the tax laws that enable it may have been to be too much for the IRS to handle with the resources dedicated to it.

“The individual tax return of the former President included the activities of hundreds of related and pass-through entities, numerous schedules, foreign tax credits, and millions of dollars in [net operating loss] carryforwards,” the Ways and Means report found.

The lone IRS agent assigned to one of Trump’s audits noted that “the lack of resources was the reason for not pursuing certain issues on the former President’s returns.”

“With over 400 flow-thru returns reported on the form 1040, it is not possible to obtain the resources available to examine all potential issues,” an internal IRS memo stated, according to the report.

While the committee dumped thousands of pages of documents on Trump’s taxes on Friday, it did not release IRS audit files along with them — a notable omission since the reason for obtaining and releasing Trump’s returns was supposed to be IRS oversight.

“Where are the IRS workpapers?” tax expert Steve Rosenthal said in an email to The Hill. “I thought the Ways and Means Committee was sharing Trump’s tax returns to allow the public to assess the IRS audit. The Joint Tax Committee reported the IRS audit was abysmal, which seems correct. But Joint Tax used the IRS workpapers to illuminate. We ought to see them also.”

The IRS is set to receive $80 billion in additional funding over the next decade, nearly doubling the operating budget of the agency on an annual basis and improving its capacity to audit complex business operations such as those belonging to Trump.

But a structural discrepancy in the U.S. tax system between the way workers and business owners are taxed means that this new money for law enforcement might not be as effective as more legal reforms.

“Under the current system, American workers pay virtually all their tax bills while many top earners avoid paying billions in the taxes they owe by exploiting the system,” Treasury Secretary Janet Yellen said in 2021.

“At the core of the problem is a discrepancy in the ways types of income are reported to the IRS: opaque income sources frequently avoid scrutiny while wages and federal benefits are typically subject to nearly full compliance. This two-tiered tax system is unfair and deprives the country of resources to fund core priorities,” she said.

Tax reform advocates say it’s time to be taxing wages and capital in the same way.

“We should tax income from wealth the same as income from work. Very little of Trump’s money was earned by working—most was just ‘earned’ when he sold assets he inherited that had grown in value,” Amy Hanauer, director of the Institute on Taxation and Economic Policy, wrote in an editorial for Newsweek.

“This is backwards. Lawmakers should equalize these rates so that someone who wakes up at 6 a.m. and trudges to work in the rain doesn’t pay a higher rate than someone who sits in their inherited mansion watching the stock portfolio they were given grow,” she wrote.

Speaking in November, Fred Goldberg, who was IRS commissioner under George H.W. Bush, said that simplifying the U.S. tax code has long been a moonshot for lawmakers.

“That’s been the holy grail for 40 years,” he said.

Beyond the policy questions raised by Trump’s labyrinthine returns, their release represents the latest chapter in years of political sparring over the former president’s business career and the tactics he used to amass his wealth and fame.

Throughout his first political career, Trump and his supporters pledged he would be a ruthless dealmaker on behalf of the American people. While Trump attributed his success to a tireless work ethic and unique ability to dominate negotiations, a series of financial records, media reports and lawsuits exposed his heavy reliance on tax credits, bankruptcy litigation and fraud to build a real estate empire.

Democrats often criticized Trump for claiming to be a virtuosic businessman despite declaring bankruptcy four times and amassing billions of dollars in debt to finance a string of deals. They also sought Trump’s tax returns to assess the true nature of his wealth and the depth of his financial connections abroad.

“As the public will now be able to see, Trump used questionable or poorly substantiated deductions and a number of other tax avoidance schemes as justification to pay little or no federal income tax in several of the years examined,” said Rep. Don Beyer (D-Va.) in a Friday statement.

Trump and his Republican supporters in Congress, however, defended the former president’s business practices as a basic part of operating in real estate. The former president anointed himself the “king of debt” in 2016 amid frequent criticism of his past bankruptcies, which he called an effective way of keeping his business going.