Seven hundred and fifty dollars.
That’s the amount the New York Times reported that President Donald Trump allegedly paid in federal income taxes in 2016 and 2017. It also found that for the prior 10 out of 15 years, Trump paid no federal income taxes due to insurmountable losses claimed on his corporate tax returns.
Trump’s shockingly low tax bill confirms what many of us already know—the U.S. tax code tends to favor the wealthy and shines a light on our system’s inequities. For many years, the tax code has allowed large corporations and its owners to creatively escape the hand of Uncle Sam.
Trump is not the first wealthy businessman to take advantage, nor will he be the last.
How Is It Even Possible For A Billionaire To Have A $750 Tax Bill?
One word: Write-offs.
After the Times story release, Trump tweeted he was entitled to depreciation and tax credits to help lower his tax bill. The tax code allows businesses and real estate investors to claim depreciation, which is a deduction for the wear and tear of certain assets. However, investors such as Trump may find ways to benefit even more from this provision.
For instance, real estate investors can take a loss from real estate activities up to $25,000 on their tax returns. However, the tax code has a particular caveat for anyone classified as a real estate professional. These investors can deduct unlimited amounts of losses if 50% of their businesses include real estate and perform more than 750 hours of real estate services in a year. This rule can reduce other income that comes from other sources.
And the write-off opportunities do not stop there.
According to the Times’ story, Trump incurred huge losses during multiple periods. From 1985 to 1994, Trump showed more than $1 billion in losses. In 1995, the tax data showed he lost $915 million. In 2018, his losses totaled about $47 million.
And with these losses come special tax reduction abilities. These losses generate what the IRS refers to as net operating losses, when business expenses exceed revenue for a certain period. Trump and wealthy investors alike can benefit from net operating losses in the years to come.
“A net operating loss is a tax credit that results from a business having more expenses than income during the tax year. Net operating losses can substantially reduce a business owner’s federal tax liability for many years,” said Tracey Carney, an independent CPA in New Orleans.
The inherited inequities within our tax system
It may enrage you to think of the thousands, perhaps millions of small business owners and independent contractors that shelled out more in federal income taxes than someone like President Trump, who owns hundreds of businesses and can afford to take sophisticated bookkeeping maneuvers. But this is the design of our tax system.
Over the past few decades, the tax code has favored the wealthy. During the late 1980s, President Ronald Reagan drastically reduced the tax rates for top earners, but the top income levels remained the same. The result is that under the current tax code, the same tax rate could apply to both the CEO of a “mom and pop” store and the CEO of a multibillionaire company.
Beyond even the tax rates, the tax code lets the wealthy and corporations escape Uncle Sam by applying certain deductions that are not available to Main Street America.
From accelerated depreciation to net operating losses, the system creates an uneven playing field. While these deductions and credits are implemented on the corporate side, these tax strategies still played a significant role in reducing Trump’s personal federal income tax bill.
“There are certainly some tax advantages available to larger corporations that are practically unavailable to individuals. Most large businesses have full-time staff available to help negotiate the tax laws,” said Matt Gardner, a senior fellow at the nonpartisan Institute on Taxation and Economic Policy (ITEP) and a corporate tax expert who regularly studies Fortune 500 corporate taxation issues.
A 2019 study conducted by Lorena Roque, Steve Wamhoff, and Gardner found that the 379 profitable Fortune 500 companies paid an effective federal tax rate of only 11.3% for 2018. Even more alarming, 91 of these highly profitable companies paid no federal income taxes at all. The study also found that 56 of the companies paid an average tax rate of only 2.2 percent.
According to Garrett Watson, a senior policy analyst for the Tax Foundation, corporate tax expenditures made up about $201.8 billion for the 2018 tax year. One way to move towards equity would be to expand the corporate tax base, which would help to get corporations to pay their fair share.
“Corporate base broadening or expansion means eliminating specific tax incentives, credits, and deductions that provides a larger overall tax base,” Watson said. Lawmakers could consider increasing the amount of income or number of assets subject to taxation by corporations, although in recent years, this hasn’t been a legislative priority.
Until steps are taken to ensure inequities do not exist in our U.S. tax system, stories such as billionaires paying less taxes than everyday citizens will continue to exist.