If you needed any convincing that America’s tax system favors the rich, the New York Times’ investigation into Donald Trump’s inheritance should settle the matter.
The US president’s father, Fred Trump, transferred more than $1 billion to his children over the years, the Times reports. Such an inheritance could easily have been taxed 55%, but the Trumps only paid a fraction of that: $52.2 million. That means America lost out to the tune of about half a billion dollars.
How did they get away with paying so little tax, when much poorer Americans pay their fair share? In part because of the toothlessness of the IRS, experts told Quartz.
Embarrassing misses
Three New York Times reporters managed to unearth a trove of information about the Trump family business that IRS officials, with all their power, training, and knowledge, could not.
Take, for example, how the IRS let the Trumps lowball the values of their buildings to a ludicrous extent. In one case uncovered by the Times, the Trumps said under oath that a building was worth $17.1 million when trying to secure planning permission. Just 18 days later, they told tax authorities it was worth $2.9 million. The IRS’s response to this 83% drop in value? To make them increase the valuation by just $100,000.
The IRS didn’t respond to an emailed request for comment yesterday afternoon.
The underfunded IRS
Cracking down on millionaires tax payments is tricky. A salaried worker’s tax returns can be easily checked against the income information sent to the IRS by their employer. But the only way to clamp down on elites, who spread their wealth across myriad business instruments, is through an audit. That takes time and resources that the IRS often doesn’t have, especially when competing against people who can employ a team of ingenious accountants solely working to outfox the authorities.
“The game is tilted towards the tax gamer,” says Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. “It’s very difficult to sort through complicated, byzantine business structures…the IRS is really outgunned.”
Enforcement was already weak when Trump inherited the last of his millions in 2004, and the IRS has faced enormous budget cuts since the Republicans took over the House in 2010. The budget has been slashed by 18% (adjusted for inflation) since then, causing the number of tax fraud cases to drop by nearly a quarter and audits of those earning over a million plummet more than 60%.
Tax evasion begets tax evasion
Seeing people like the Trumps flagrantly avoid—and perhaps illegally evade—taxes has a “longterm corrosive effect” on the whole system, Rosenthal says. A lot of the IRS’s power is normative: Someone you know, or someone famous, gets dinged by the authorities, so you make sure you get your return in. However, “at some point people stop self-reporting if they don’t think they’re going to get caught,” Rosenthal says.
The first thing government can do to restore faith and effectiveness to the tax system is “a rebuilding of the IRS,” says David Kamin, a law professor and tax expert at New York University. He argues the budget should “immediately go up” and that enforcement should be focused on people at the top, where you get “the biggest bang for your buck.”
It might take a while to undo the decimation wrought on the institution, but the investment would ultimately more than pay for itself—the IRS brings in $4 of tax revenue for every $1 added to its budget.