By Lily Batchelder
Ms. Batchelder is a professor of law at the New York University School of Law. Oct. 4, 2018
A portrait of his father, Fred Trump, sits behind President Trump in the Oval Office. The president participated in dubious tax schemes that greatly increased the fortune he received from his parents.CreditCreditJonathan Ernst/Reuters
We always knew President Trump was being misleading when he portrayed himself as a self-made man. But until Tuesday’s bombshell Times story, we did not know the breathtaking scale of the deception, or the extent to which his wealth was built on tax evasion.
This raises two questions. First, what can and should tax authorities do about the specific allegations of tax evasion and fraud by the Trump family detailed in the article? Second, what can lawmakers do to ensure that those who inherit extraordinary sums are paying their fair share?
While the statute of limitations has already passed for many of the alleged violations, the Trump family still can be pursued for civil tax fraud. This could result in members owing back taxes, interest and penalties. New York State and New York City have already announced they will investigate. The Internal Revenue Service and the Department of Justice should, too — potentially by appointing a special counsel.
These agencies should not just look at the estate tax, but also at whether the Trump family committed income tax fraud. For example, did the president and his siblings claim the properties they inherited had a different — and much higher — value for income tax purposes than the lowball valuations claimed for the estate tax?
But even if the tax authorities cannot make the Trumps pay the taxes they evaded because of the time elapsed, the article raises a much broader issue: People who live off inheritances pay tax at much lower rates than people who earn their income through good, old-fashioned hard work. In 2009, for example, the average federal tax rate on income from work and savings was about 18 percent, compared with 4 percent for inherited income. The Trumps are an extreme example of a more general problem.
The tax advantages for heirs are partly due to fundamental problems in the law. Income from wealth is taxed very lightly and sometimes not at all. Moreover, our income and payroll taxes allow heirs to exclude everything they inherit from their tax returns, no matter how vast. The estate and gift taxes were meant to partly address this omission, but they have been cut relentlessly over time, falling from 2.6 percent of federal revenues in 1972 to less than 1 percent today, even while the share of wealth and income held by those at the very top soared.