his statements do not mean that the whole tax code is flawed
After New York Times report that President Donald Trump has paid no income tax in ten of the past 15 years, and little in the remaining five years, some, like Senator Bernie Sanders, have implicit that these returns are normal for the very rich. The numbers do not support this claim by any means, and the idea that wealthy Americans get away with paying little or no tax is the recipe for bad tax policy.
At the center of the debate are deductions for net business losses and the ability to “carry forward” those losses to offset future tax bills. According to the Times, the president reported losses totaling hundreds of millions of dollars from hotels, golf courses and other properties. These losses would have played the biggest role in allowing Trump to limit his income tax over several years.
The myth that the rich don’t pay taxes is wrong
But the idea that low tax burdens are typical for taxpayers of the president’s wealth level is entirely false. In tax year 2017, the latest year for which data is available, the richest 1% of taxpayers paid 38.5% of the total amount of federal income tax. Far from paying little or no tax, the richest 1% of taxpayers paid an average federal income tax rate of just under 27%. The average taxpayer, on the other hand, paid less than 15% federal income tax, which, of course, does not even take into account the tens of millions of taxpayers without any income tax obligation– or even those who on the net receive money from the federal government because of refundable poverty reduction credits.
It is also not common for net operating loss deductions and carryforwards to play such an inordinate role in a taxpayer’s balance sheet. During the same tax year, the richest 1% of taxpayers reported $ 60.3 billion in net business losses, compared to $ 609.3 billion in net business income. In other words, there is hardly an epidemic of wealthier Americans avoiding income tax by reversing net losses.
And it’s important to note that the vast majority of individuals and businesses abide by deduction limits, and use them as intended, to smooth tax obligations in the face of “lump-sum” net income that can increase or decrease significantly from year to year. the other. The alternative is a “face I win, face you lose” scenario for Uncle Sam, where the federal government effectively taxes more than the true economic benefit of a company simply because its financial fortunes cannot. -be not well followed the calendar year.
Trump tax returns: Reality TV businessman becomes America’s chief loser
This isn’t the first time that a sensational headline has sparked breathless opinions about a rigged tax system. News about the low taxes to be paid for big companies like Netflix, General Motors or Amazon in any given year caused a lot of popular angst, but again the title has clouded the whole story.
Don’t revise the tax system just on the basis of Trump’s tax returns
These businesses, like almost all businesses that have a low tax liability in a single year, have made significant use of deductions for net operating losses carried forward from previous years, as well as others, bipartite tax code provisions such as research and development credits and stock-based compensation deductions. These provisions are smart measures, widely supported by tax policy experts, that are fully defensible on their merits, regardless of their impact on a large corporation’s tax liability.
Much like Trump’s tax case, revising the code to raise taxes based on information about the liability of a single taxpayer would be a mistake. Just as deductions for net operating losses are important in ensuring fair tax treatment, the ability to carry these losses forward allows taxpayers whose income is up one year and down the next year to smooth over these losses. their tax treatment in good and bad years. .
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As the president’s taxes continue to be a hot topical issue, taxpayers should be wary of attempts to use history to push through discredited and problematic tax increases in a knee-jerk reaction. Let there be no doubt: the tax code still needs to be modernized. But to base this reform on the tax return of one man would be a mistake.
Andrew Wilford is a policy analyst at the National Taxpayers Union Foundation, a nonprofit organization dedicated to tax policy research and education at all levels of government.
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