Shortly before she went to prison for tax evasion in 1989, real estate magnate Leona Helmsley, the Queen of Mean, was famously quoted in the New York Times: “We don't pay taxes. Only the little people pay taxes.”
After this week’s reporting in the same newspaper that Trump claimed tax losses of over $1bn in a similar time frame and didn’t pay taxes for eight of 10 years from 1985 to 1994, Donald Trump had his Leona moment: “You always wanted to show losses for tax purposes,” he tweeted, “it was sport.” So long before Trump was spending his presidency cheating at golf, he played a different sport: tax avoidance.
No one likes paying taxes, but the existence of a large, self-reporting, equitable tax base is a pillar of a prosperous democratic society. A large tax base assures that there will be sufficient resources to pay for traditional public functions; societies can debate what those public functions should be — how much defense or how much healthcare, for example — but without a large tax base, public choices are severely constrained and public goods severely limited.
It is also critical that the system basically works on the honour system. Where voluntary compliance is not culturally ingrained, the result is frequently poor social cohesion and excessive expenditure on tax enforcement which further depletes public revenue. And as Adam Smith noted in The Wealth of Nations more than two centuries ago, fairness is the first canon of a good tax system.
Fairness does not require that every person pay the same percentage of his or her income; progressive taxation is equitable, given that people who earn more get more from a stable society. Fairness does require at a minimum that similarly situated individuals should pay taxes on a similar basis. It also requires that those with power and wealth do not take steps to skew the tax system in their favor so they pay less than those with less political power.
By that measure, the United States is in bad shape and getting worse. People who work pay tax at far higher rates than those who derive their income from investments. Hedge funds managers pay tax lower rates than their secretaries. Tax losses can be created from thin air and can be offset against income for years.
At the nadir of the equity pyramid stands Donald Trump. It is hard to tell whether his losses are manufactured or the result of appalling business acumen, but there can be no doubt that Trump lived pretty well for someone whose losses went into 10 figures, only to be used to offset his income for years into the future.
Historically, no one has paid taxes voluntarily at the rates that Americans do. It is part of a virtuous cycle that has fueled growth and civic cohesion. This is not the case in many other countries. Among developed countries, Italians, for example, have much lower taxes. Ex-prime minister Silvio Berlusconi once famously claimed that the “evasion of high taxes was a God-given right.”
Italians don’t have trust in the honesty or competence of their government or the fairness of their system and respond accordingly. In developing countries like Pakistan, the number of people who declare income above the threshold for payment is 2 per cent and only 1.1 per cent of GDP comes from personal income tax. Only those whose income is officially recorded and tax withheld at the point of payment, like government workers, tend to pay income tax at appreciable rates.
Low trust leads to low compliance leads to low-quality government and a continuing vicious cycle. States then try to plug the gaps with higher rates, which leads to more evasion; or with sales or value-added taxes, which fall most heavily on those at the bottom of the economic pyramid who need to consume rather than save or invest. Once started, this is very difficult cycle to stop, and populist politicians foment the idea that people are overtaxed, impose pledges and try to “starve the beast”, which leads to an explosion of deficit spending and generally cuts in public programs that then increase inequality. Most anti-tax groups are not attacking the oil depletion allowance or the hedge fund carried interest exception. Few are calling for capital gains to be taxed at the same rate as ordinary income.
The 2018 Trump tax cut put pennies in the pockets of most Americans and many millions in the pockets of the 1 per cent. But tax policy-makers who have skewed the tax system against the poor have until now tried to keep it quiet.
No one likes to be told they are being screwed. Now Trump has characteristically put out in the open what conservatives have tried to cover up for years.
For the wealthy, avoiding tax is a sport, a new sport of kings for the age of Trump. Advantage begets power which begets more advantage. Those to whom much has been given — and no one has been given more than Trump — can game the system to get even more and contribute even less.
Will American taxpayers get fed up with our new Berlusconi? Will they take up the new sport of not paying taxes? Or will they decide they no longer want to be treated as chumps?
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