In August, I offered to put my money where my experience is. My 2 Million Dollar Challenge to Donald Trump and Warren Buffett to release their tax returns and allow me to moderate a discussion on taxes. My 47 years in the tax industry certainly qualifies me for the job. Plus, the money would go to approved charities of their choice-- and the American public would get a much-needed education. So far, no takers.
Now, I've been asked by Inc. to show how Trump is able to avoid paying much (if any) federal tax on his income. That's easy, because it's not listed as personal income for tax purposes. Let's start with the New York Times headline most of the country is responding to today: "Trump Tax Records Reveal He Could Have Avoided Paying Taxes for Years." The paper cited earlier records and business losses of nearly $1 billion spread over 18 years. This is only part of the deduction strategy.
In my industry, many of us read a lesser-known publication, Accounting Today, which on September 29 ran a headline, "How the IRS Helps the Rich Get Richer."
Basically, the top 1% of Americans (as measured by income) bring in 17% of all U.S. income before taxes, each year. However, according to a new analysis by the Tax Policy Center, that top 1% gets 27% of the federal tax breaks. Yes, that includes Trump.
This is why in the first cringe-worthy presidential debate, when Hillary Clinton accused Trump of not paying federal income tax in some years, he answered, "That makes me smart."
Here's how it works. On Trump's Personal Financial Disclosure Form with the Federal Election Commission, he lists more than 500 companies he's associated with as President, Member, Partner, Director, Chairman or Shareholder, for example. Notice that "Employee" is not one of his titles.
The income type is listed as golf-related revenue, resort-related revenue, commissions, rent, interest income, condo sales, royalties, management fees, etc. Notice that "salary" is missing. In other words, it's unlikely that he's receiving wages as a W-2 employee, as are the majority of Americans who count themselves lucky enough to be employed.
When Trump filed his first disclosure form last July, his press release indicated that "Mr. Trump's income for the year 2014 is $362 million dollars." For businesses, income basically means revenues minus expenses.
Each one of these businesses has specific rules for accounting purposes. For example, in operating a golf course, Trump may use one type of business structure (a corporation) and a different accounting method than say a limited liability company or partnership. For each subsidiary under his HUGE holding company, The Donald would then hire an expert to maximize tax loopholes for that particular business.
Smart, yes. Legal, yes-- to my knowledge without having the opportunity to review the tax returns. I'm still available, by the way.
Here's the larger question for this election-- should a potential President of the United States of America brag about avoiding taxes and give the answer, "because I'm smart," to millions of Americans who work 2-to-3 jobs and still struggle to feed their families? All while paying a large chunk to Uncle Sam at tax time? Trump's answer leaves most Americans scratching their heads and others asking, "Well, if he doesn't pay federal taxes, why should I?"
Let me give you one good case in point. This past year, my company launched SiempreTax+ the first tax franchise specifically for the Hispanic community. The Association for Mexican Entrepreneurs asked me to help explain to its young members why paying taxes is important at all. In fact, they also issued a challenge to me, "Please Give Us 10 Reasons For Paying Taxes?" I'll tell you what I told them:
1. Health care. Approximately 22.5% of income tax revenue goes toward health care programs. The two big expenditures are for Medicare and Medicaid, but additional amounts go toward health research, food safety, and public health services and disease control.
2. National defense and security counts for roughly 20% of the federal budget.
3. Social Security accounts for another 20%, according to the Center on Budget and Policy Priorities.
There are many more services your tax dollars provide, but these will round out the top ten:
4. Police protection and law enforcement
5. Educational services
6. Transportation services, including construction of roads and highways
7. Public parks
9. Natural resources-- such as our water supply
10. Public buildings/facilities
Trump has claimed that a percentage of our taxes is wasted by the government-- so are taxes necessary? Yes. The free enterprise system simply doesn't produce all the services needed by society. Taxes are the working capital that allows our society to function. Plus, I see a few areas on this list at least that Trump has promised to strengthen: national defense, law enforcement and transportation services.
Sure, Trump can legally get out of paying federal taxes under our current tax code, but if he becomes the next President, should he? He can certainly lay that burden on the backs of millions of Americans who don't have the benefit of his financial education.
He may be "smart," but is it right?