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In Monday’s debate, Republican nominee Donald Trump boasted that he paid little or nothing in federal income taxes in some years. Tax experts say this is highly unusual for such a high earner, unless he operated his businesses at a net loss. In general, high-income Americans pay more federal income taxes than middle- or low-income households. About 43% of households do not pay any federal income taxes because they are too poor. High earners, including real estate developers like Trump, however, can use several techniques to minimize taxes, including tax deductions for depreciating property. Who pays federal income taxes, who does not — and why.
- Richard Rubin U.S. tax policy reporter, The Wall Street Journal
- Chris Edwards Director of tax policy studies and editor of DownsizingGovernment.org, Cato Institute
- Howard Gleckman Senior fellow, Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution
MS. DIANE REHMThanks for joining us. I’m Diane Rehm. During the first presidential debate, Republican nominee Donald Trump justified paying little or nothing in federal taxes. Here's the exchange that took place between him and Hillary Clinton.
HILLARY CLINTONMaybe he doesn't want the American people, all of you watching tonight, to know that he's paid nothing in federal taxes because the only years that anybody's ever seen were a couple of years when he had to turn them over to state authorities when he was trying to get a casino license and they showed he didn't pay any federal income tax. So if he's...
DONALD TRUMPThat makes me smart.
CLINTON...paid zero, that means zero for troops, zero for vets, zero for schools or health...
REHMWith me to talk about Trump's claim, who pays federal income taxes and who does not, Howard Gleckman with the Tax Policy Center at the Urban Institute, Richard Rubin with the Wall Street Journal and Chris Edwards with the Cato Institute. I'm sure you'll want to weigh in. Give us a call at 800-433-8850. Send your email to email@example.com. Follow us on Facebook or Twitter. Thank you all for joining us.
MR. HOWARD GLECKMANGood morning.
MR. CHRIS EDWARDSGood morning.
MR. RICHARD RUBINGood morning, Diane.
REHMGood to have you all here. Richard Rubin, first let's fact check. Is everything Hillary Clinton said true?
RUBINMostly. We haven't seen any of Trump's actual tax returns. We have seen our reports from the state casino commission in New Jersey which show that in a couple of years in the late '70s, he paid no federal income taxes. Other years he paid some. There are other records that indicate he paid none at one point in the '80s and the most recent one we have shows that he had what are called net operating loss carry-forwards in 1993.
RUBINAnd that means he had lost money, was using those losses and could use those to offset future income and thus pay no taxes. So she's right in that sense about those past years, but we don't know is exactly what he's paid since then in the years since his career has rebounded. He's, you know, his that makes me smart comment, does that tell you hasn't paid taxes since then? I'm not quite sure how to interpret that.
REHMAll right. Aside from the interpretation of that comment, how would he or how might he have avoided paying taxes?
RUBINSure. Let me -- let's walk through four possibilities, really quickly. One is the one that happened in the '90s, which is he's losing money. So if you have -- if you are losing money, you don't have to pay taxes. That's not necessarily something that makes a taxpayer smart. I mean it -- I'd rather make $5 and pay 2 than lose 3. Second thing is he could be taking advantage of the ways in which the real estate developers can lower their tax bill. So they get deductions for the depreciation of a property, they borrow and get deductions for interest.
RUBINMaybe they're, you know, paying labor, which is deductible, they're paying maintenance costs which are deductible. And so that nets out to relatively little or no income, possible. Again, we don't know for sure. The third possibility is sort of aggressive use of tax deductions. We know, for example, he's donated development rights on some of his properties for which you can claim a charitable deduction. There's all sorts of other ways that taxpayers can legally and very clearly reduce their tax burden.
RUBINAnd so that could get him down really low. And the last thing, which, again, this is not to say that we have any evidence that he's doing this at all, is just flat-out cheating and doing what tax lawyers call playing the audit lottery. That is not necessarily smart because if you get caught, you're in real trouble. So is it smart? It depends really, right? If you're losing money, that's not smart. If you're taking advantage of breaks that are in the code, that can be smart. If you're cheating, that's not so smart.
REHMRichard Rubin is a U.S. tax policy reporter at the Wall Street Journal. Turning to you, Howard Gleckman, in general, high income Americans pay more in taxes, do they not?
GLECKMANThat's correct. The income tax system we have in this country is very progressive and that mean that high income people generally pay more than lower income people do. I will say that it's extremely rare for the highest income people to pay no income tax. According to Tax Policy Center data, 99.8 percent of people in the top 1 percent, people making more than about $690,000 a year, 99.8 percent of them pay some income tax.
GLECKMANSo it would be very unusual for Mr. Trump to be paying no taxes. In general, high income people pay about a third of their income in federal taxes.
REHMHoward Gleckman, he is with the Tax Policy Center. That's a joint venture of the Urban Institute and Brookings Institution. Turning to you, Chris Edwards of the Cato Institute, as you've just heard Howard say, high income earners usually pay a fair amount more than anybody else. Their tax rate is higher. Is that right?
EDWARDSThat's right. If you at IRS data, the top 1 percent of highest earners pay an average federal rate of about 37 percent. So it would be, as Howard said, it would be extremely surprising if Trump paid no tax. I suspect, pure speculation, that he just has a low rate and he's embarrassed about it, perhaps. As Richard pointed out, real estate businesses can often -- there are a lot of provision they can lower their tax substantially. For example, a lot of real estate businesses are highly leveraged, meaning they're heavily in debt.
EDWARDSYou can deduct a huge amount of interest payments. There are certain exchanges where you can avoid capital gains tax by selling a smaller property when you invest in a bigger property. Trump has a lot of royalty income, we think, because he licenses his name everywhere. Royalty income you can move around a bit and you can move it offshore, for example. So I think all of this is perhaps an argument, if Trump has a very low tax rate, it is argument for major reform to get rid of some of the special breaks and deals that certain industries get and to use that money to lower rates overall so you get a more flat and even tax rate across industries, rather than letting some individuals and industries pay very low rates.
REHMChris Edwards of the Cato Institute. And you are welcome to join us, 800-433-8850. Send an email to firstname.lastname@example.org. Howard, what about low income people, people who are not paying taxes? At what point is there a cutoff?
GLECKMANSo let me start by giving you the averages. So on average, about 55 percent of American households pay some income tax. About 75 percent pay some payroll tax and about 8 out of 10 pay either one of those. So that's on average. Among the lowest income people, and we divide the world into fifths, so the lowest 20 percent, the next 20 percent, so it's like the lowest 20 percent. Those are people making less than about $24,000 a year. About -- only about 11 percent of them pay income tax.
GLECKMANIn fact, many of them not only don't pay income tax, but they actually get money given back to them from the federal tax code through refundable tax credits, like the earned income credit and the child credit. However, about 56 percent of them pay payroll taxes and about...
REHMPayroll taxes? So they are working.
GLECKMANThey are working. That's correct. They're working. They're having payroll taxes withheld for Social Security and Medicare. So we always have to be very careful when people throw around this number about 45 or 47 percent pay no taxes. That's not right. They pay no federal income taxes, but they certainly pay other taxes. When you get into the middle of the income distribution, people making, say, between 50 and $80,000 a year, typical middle class American households, about a third of them pay income tax.
GLECKMANAbout 80 percent pay payroll tax. So, again, you see that payroll tax is a bigger tax obligation for them than their income tax, but they do pay some income tax. And then, at the very top, 9 out of 10 people pay -- or actually almost 99 percent of people pay income tax.
REHMAnd, of course, everyone, Richard, pays sales tax.
RUBINSure. To the extent that you are purchasing goods, at least if you're not in one of the few states that doesn’t have a sales tax, you're absolutely paying sales taxes. I think, according to data from the Tax Policy Center, for 80 percent of households, the payroll tax is a more -- it costs them more. It's a more, you know, bigger burden on households than the income tax is. So the income tax is really the biggest tax for the upper -- roughly the upper 20 percent, upper third of households that they're concerned about and not for everybody else.
REHMYou know, this whole issue came up in the last election when Mitt Romney made a comment about the 47 percent who don't pay income taxes. Where did that figure come from?
RUBINFrom the Tax Policy Center. That number is higher than it is now because it was during the recession of 2009 through 2000 -- you know, '07 through '11 when the economy was lower. You know, people weren't making as much money and Congress had come along with various tax breaks and refundable tax credits in order to lower that burden and that created that number. And so over the long run, what we've done is try to use the tax code to direct subsidies to people and we can talk about that more.
REHMRichard Rubin, U.S. Tax Policy reporter at the Wall Street Journal. We'll take a short break here. When we come back, we'll talk about tax policy and whether it might somehow be changed.
REHMAnd welcome back. We've got three knowledgeable people on taxes here in the studio. Howard Gleckman is with the Tax Policy Center, Richard Rubin at the Wall Street Journal, Chris Edwards at the Cato Institute. Here's an email from Liz in Baltimore. Whose salaries and which governmental agencies are funded by federal taxes? Donald Trump is proud not to have paid taxes and said they would be wasted, yet he's gung ho on bombing our enemies, including ISIS. Who would pay for that, Howard?
GLECKMANWell of course the only way to pay for the military and for the Centers for Disease Control and Homeland Security and all the rest is with taxes. That's how we do it.
REHMAnd here's an email from Ann. How is it that American expatriates are expected to pay taxes in both this country and the country they reside in, yet a millionaire from New York who resides in the U.S. pays none, from a long time expat, originally from New York. Richard?
RUBINSo American expats can get what's called the foreign tax credit. You can essentially credit your foreign taxes against your U.S. taxes. But unlike the way a lot of other countries do it, where you're basically taxes where you're a resident, the U.S. taxes its citizens worldwide, and expats don't like this and are livid about it, and the U.S. in the past few years has actually made even harder, by imposing a lot of new rules and restrictions. That was designed to go after all the undeclared Swiss and Luxemburg bank accounts that were out there, but for your average high-income, law-abiding expat in Singapore or Hong Kong or London, tax filing has become really onerous in the past few years.
REHMChris Edwards, you actually think that tax rates for high-income earners ought to be lower. How come?
EDWARDSBecause if you look at who's in the top group of earners, I think they're extremely important people to the economy. So for example we have a lot of, say, venture capitalists and angel investors. These are entrepreneurs who make a lot of money, then turn around and pump the money back into startup companies and businesses in Silicon Valley and elsewhere. Those people are extremely important to the economy. They make our economy dynamic. You tax them too much, they're going to -- they're not going to invest as much.
EDWARDSOr look at, say, doctors and surgeons. Looking at this data recently, there's 700,000 doctors and surgeons in the United States. They have of course very high average incomes, and they're the exact type of people, when you think about it, they work extremely hard. If you tax them more, they're going to decide, well, they're going to cut back on their hours, maybe they'll retire earlier. They will change their behavior if you tax them too much, and I think that will hurt all of us.
REHMHow do you respond, Howard?
GLECKMANWell, I think that the -- almost every economist that you talk to, whether they're conservatives, or whether they're liberals, will agree that we probably should reduce tax rates, particularly on business but even on individuals. But there's a tradeoff, and it's the tradeoff that you can't get the politicians to talk about, and that is reducing tax preferences that people use, as we've been talking about before, that people use to reduce their taxes. That's the difference between, for example, the marginal tax rate, the top marginal rate, which when you add in the Affordable Care Act taxes is in the mid-40s, and the effective rate that people pay.
GLECKMANThe reason it goes down is because they use tax preferences. Many of those tax preferences benefit middle-income people, the mortgage interest deduction, the exclusion for employer-sponsored health insurance. If you're going to reduce rates, you also need to get of those preferences. Politicians don't talk about that. Instead what they say is we're going to reduce rates, and we're going to close loopholes. Closing loopholes is not going to get you there.
RUBINWell, I think one thing to think about is what we heard from Secretary Clinton the other night at the debate, and she's really focusing her proposed tax increases at the very top of the income distribution, on some of the people that Chris was talking about, and her argument is basically, look, these people have done really well, are doing really well, there's a lot of inequality in the country, and we should basically go where the money is to get additional revenue to pay for the kinds of expanded programs that she wants.
RUBINAnd so that's a political choice about their fair share is. You'll hear her use -- and other Democrats use that phrase, and it's really a political choice for politicians and voters to make about what's fair and what isn't.
REHMOn the other hand, if you're in favor of smaller government overall, you're going to be in favor of reducing taxes.
EDWARDSRight, but I would concur with something Howard said earlier, that Donald Trump, like many Republican politicians, they're exceedingly inconsistent in their desire for smaller government. They always want to cut taxes, but they never tell us what spending programs they want to cut. And Trump is a classic example of this.
EDWARDSI mean just -- he comes out, and he says, well, he would cut waste, fraud and abuse. Well, that's nonsense. You know, we have a $500 billion deficit. If you want to cut taxes and also deal with the deficit -- he claimed he's going to balance the budget, too. So you need major, substantial reductions in the government in order to -- for his tax plan to be fiscally responsible.
REHMHere's an email from Barbara. This is one I had never heard. She says the other day on CSPAN, a man asserted that federal employees do not pay federal income taxes, implying that they're exempt. As a retired federal employee, I hope you take advantage of this assessment -- sorry, this segment to assert federal employees do pay federal income taxes just like everybody else. Do you suppose there are rumors floating out there that federal employees don't pay federal income taxes?
GLECKMANApparently they are, but let me take the caller up on her -- on her offer. I will assure you that federal employees do pay federal income taxes and state income taxes.
EDWARDSBut there may have been a -- World Bank employees and some other employees of international institutions don't pay U.S. income tax. Maybe there's some confusion.
RUBINRight, in the past there's been, you know, exemptions of some state and local officials from -- government employees from Social Security taxes, but that's changed, as well. So there are -- there's maybe some truth in there somewhere. You hear all sorts of odd arguments out there about who isn't subject to federal taxes.
REHMAll right, Richard, I want to go back to the four points you made at the beginning of the program as to how and why Donald Trump may legally and appropriate not be paying taxes. Number one, maybe he's losing money.
RUBINRight, and let's distinguish for a minute between losing money for -- in terms of losing wealth and losing money for tax purposes, right, which are not the same thing. What a tax return tells you, and you've heard Trump talk about how tax returns don't tell you anything, what he means and what he said when he's talked about it more expansively is tax returns are not a net worth statement, and that's right. We don't have a wealth tax on people, estate tax aside at death, but we don't have a wealth tax, we have an income tax, and it's income as realized and as measured by the income tax code.
RUBINAnd so you can still see big increases in your wealth. Take a simple example, if you hold stock, and the value of the stock goes up from January to December, and you don't sell anything, you don't owe any taxes on that. And so what happens is that people can exploit the differences between increases in wealth and reported income for tax purposes. And so that might be some of what's going on. Or it could actually be he's got money-losing businesses.
RUBINIt's -- you know, for a long time there were tax shelters out there that sort of let people invest in money-losing businesses to offset their actual taxable income. That's less common now, but that's -- that's the game for a high-income taxpayer is to find ways to reduce the top line, not really to -- your AGI, your reported income, not really -- you know, once you've got that, there's only so many things you can do in terms of charitable deductions and mortgage interest and whatever to get the bottom line, the tax you owe, down to zero.
REHMHowever, at one and the same time, Donald Trump has been talking about not only how wealthy he is, in the billions of dollars, and how much he gives to charity. Does all that sort of mesh with the idea that he hasn't paid any taxes, Howard?
GLECKMANWell again, it's really hard to tell. If in fact he was giving large amounts of money to charity, that certainly would be a way for him to reduce his taxes. We've seen stories in the Washington Post and elsewhere that suggest that he does not give large amounts of money to charity. But again, we don't know for sure. It really is a black box, and until we see tax returns, all we can do is speculate on what his financial situation is and what he pays in taxes.
REHMAnd how do you react to this whole notion that he pays nothing in taxes?
EDWARDSYou know, it's not a good outcome from the tax code. I think we should have more equal and proportional -- economists call it horizontal equity in the tax code. People of similar means ought to pay sort of similar amounts of income to the federal government. As I mentioned, the top one percent pays an average federal income tax rate of 37 percent. And when you think about it, that's the average. That means some wealthy people pay more than that, and people like Trump, if they really do pay zero, man, they're really, you know, pulling the average down. So it would be very surprising, but I think that is the reason why we need major tax reform.
REHMHere's a tweet from Curtis, who says the rich are different from the rest of us. They have their own tax code. How do you react to that, Richard?
RUBINTo some extent that's true. I mean, it's not that they have their own tax code, they just have the ability to take advantage of more of the provisions that are out there. So, you know, if you've got a million at stake, you know, you're willing to spend $50,000, $100,000 on tax advice to try and save that. So it's not that there's a different tax code, but really there are all sorts of opportunities that are out there for high-income households that don't exist in quite the same way for wage earners.
RUBINThe biggest example, think of, you know, investment income is taxed as capital gains, or again like my example from a couple minutes ago, isn't taxed at all until you sell. So high-income taxpayers who have money to spend don't necessarily need to sell to realize that income. They can defer that taxation until later, and deferral is a huge advantage, and they also have just the ability to seek really sophisticated tax advice.
GLECKMANRichard's right. It's not so much that they have their own tax code but that they tend to earn income in different ways than middle-income people. Middle-income people, as Richard said, basically earn salaries. If you are a high-income person, there are ways you can defer your compensation, there are capital gains, there are ways to move money into retirement accounts. It's simply a difference in the way you get paid.
REHMAll right, let's talk about your second point, real estate developers can use depreciation to avoid paying taxes. How do they do that?
RUBINWell, I mean, depreciation is basically writing down the cost of a property. Critics of those deductions will say, well, wait a minute, the whole point people -- the whole point for why people are investing in real estate is because it's going to grow over time. So that's a criticism of the tax system that's been out there for a while. And then the trick, really, is to combine that with deducting interest. Trump said the other day that he's under-leveraged. So maybe he's not deducting that much in the way of interest, but you can deduct interest as a business expense.
RUBINAnd the other thing is something that Chris talked about, which is called these like-kind exchanges, where if you can -- if you own a building, and you're trying to sell that and own a different building, you don't have to realize those gains, you essentially do what's called an exchange or a swap so that you eventually might have to pay taxes when you sell the second building that you've transferred into. And so that combination of things has made commercial real estate a really attractive place for low tax rates relative to your increases in worth -- in worth and wealth.
EDWARDSSo some of the things we're talking about here are peculiarities with the income tax, and this is why some economists, like myself, favor a consumption-based tax system. Under that sort of a system, you would get rid of some of these complex things like capital gains and depreciations that many businesses and individuals do fiddle around with to reduce their tax burden. Enron, for example, fiddled around a lot with depreciation and capital gains on its buildings that it's owned to lower its -- to avoid taxes.
EDWARDSSo major tax reform would get rid of some of these peculiarities in the code.
REHMAnd you're listening to the Diane Rehm Show. Here's a tweet from Frank. Let's see. No, it's from Bob. He says, I'm not defending Trump, and I know it's not income tax, but I would expect he pays a lot of property taxes, supporting schools. What is the New York state system on that?
GLECKMANI don't -- I assume Manhattan has very high property taxes just because valuations are so high, and this is actually something else we should have brought up that, you know, as a real estate developer, he owns a lot of properties. He would probably have very high property tax deductions. You can of course your state and local taxes on your federal returns. So that's another way he reduces his taxes.
RUBINOne thing he's done is to challenge those property tax assessments. So he does pay property taxes, but the way a lot of that works for commercial real estate firms is there's these small, boutique tax firms out there that will basically challenge property taxes for you on a contingency fee basis. So you basically have no cost out of pocket, you hire these firms, they'll go to the local government and challenge your assessment, and then they'll take a cut of the savings.
RUBINAnd so there's -- for someone like that, as opposed to, say, someone who's just got a home that they own, there's a real benefit to really aggressively challenging those annual or regular property tax assessments.
REHMIf I may, however, interpret through a tweet, which -- what was said the other night by Donald Trump, this is how some people interpreted that comment. When the poor do not pay taxes because they're poor, they're called lazy. When the wealthy do not pay, they're called smart. Richard?
RUBINYeah, I mean look, this is -- if you're in business, you're going to want to pay as low a tax rate as possible, and this is why I keep going back to the question of we don't really know whether it's smart until we know how -- what he did and how he did it. It's not smart to lose money. It is smart to use -- aggressively use business deductions and available features of the tax code to reduce your tax burden. I'll leave the sort of questions about what's fair among -- you know, to Howard and Chris, but that's -- you know, this is what business people do is seek ways to lower their costs. One of those costs is taxes.
REHMAll right, Richard Rubin, he's U.S. tax policy reporter at The Wall Street Journal. We're having a little trouble with our phones this morning, so do send your email and your tweets, your comments on Facebook. We'll try to get as many of those as we can on the air. Stay with us.
REHMAnd welcome back. Time to open the phones. They are working now if you'd like to join us. 800-433-8850. First, to Brian in Richmond, Virginia. You're on the air.
BRIANThanks for taking my call.
BRIANIt's great to speak with you.
BRIANI was just gonna make the comment that it is quite common to see real estate developers report losses on tax returns through some of the -- some of the expenses that were mentioned previously. Depreciation, interest expense, amortization. It is quite common, and while depreciation does give relief to some tax burden, it is a real expense. You know, these commercial real estate investments have capital replacement that has to take place over time. And that's really the reason that we recognize that expense and why it's important.
REHMAll right. Richard.
RUBINYeah. That's right. I mean, there's -- I didn't mean to suggest there's no reason for the (unintelligible) in the code. There's, I mean, and this is true of all other kinds of assets too. Yeah.
REHMAre we not going to know whether Trump has used any of these four points that you've outlined, including tax deductions, cheating, or tax shelters unless and until we see his tax returns?
RUBINSo, on the aggressive deduction front, you know, the Washington Post has done a bunch of great work on his foundation. You can sort of see some of it there. The other thing that I've written about is his use of these donations of development rights. And so, for example, what he's done, take one example from recent -- a couple years ago, is he's got an estate in Westchester County, New York. And he basically took about three quarters of it and says, I will never build on this ever again.
RUBINIt's attached to the deed of the property. Donates that to a land trust, and can deduct, you know, millions of dollars because of the loss in value that he's experienced. Now, the IRS often will challenge those, so you could label that aggressive or not, depending on how he valued that. To me, that's a sign, actually, that he might actually have some income, because you only have 15 years to claim those charitable deductions. So, you wouldn't trigger that on a property that you own.
RUBINYou wouldn't essentially start that clock unless you either had income you were trying to offset or you expected to have income you were trying to offset. As far as shelters and tax cheating, it's just rank speculation. I mean, you would know if the IRS started filing leans. You'd know if the IRS -- if he started, if those audits ended up in tax court. But as far as whether he's done any of that, we, we, obviously, he's not been charged with anything.
GLECKMANDiane, just to be clear, I think that seeing his tax returns would be extremely useful. But it won't tell us everything. It's important to know that, that Trump has said that much of his income comes from partnerships. And the way that was reported on a federal tax return is it's called K1 income. And essentially, it's just a dollar amount. All the interesting information is really not in the individual tax return of the partner. It's in the partnership return. And for us to really know what's happening, we'd have to see those returns.
GLECKMANHundreds and hundreds of partnership returns. Whether those would ever be disclosed is an entirely different story. But just looking at his 1040 tells us a lot but it wouldn't tell us everything.
REHMChris, how do you feel about the populists demanding that Donald Trump release his tax returns?
EDWARDSI think he should release them. You know, I don't think that there should be any law or rule to require it, but it has been tradition since I think Richard Nixon, right? And it's good. I think that especially people like Mr. Trump, really both the candidates this year, seem to have a lot of outside money making interests. And we want to make sure that to reduce corruption amongst our political leaders and one way you do that is financial transparency. So, I'm all for greater transparency with the folks who run the government in Washington.
REHMHere's an email from David in Boca Raton, Florida. Who says, the comment by the Cato representative arguing higher earners should get tax rate reductions or they will choose not to work as hard is impossible to accept. Actually, it's specious. Doctors and surgeons work to find a certain lifestyle, and if they receive tax relief, they would likely use it to buy a boat, a vacation home, travel, accumulate jewelry or gamble in the stock market. I don't see any of these options as a positive for the nation's ability to provide services to the population.
EDWARDSI don't think so, and in fact, if you look at the academic literature on the responsiveness to tax rates, it is high earners who respond more strongly to changes in tax rates than do low earners. As some of the other panelists say, moderate income earners, they basically just have their wages, they can't do much adjustment in their lifestyle. It's people at the top end, often they are entrepreneurs, business people, they can make a lot of adjustments. If the government tries to take too much of their earnings, they will move their money here and there.
EDWARDSAnd they will take, they will, you know, put more money into tax free muni bonds. There's lots of ways that they can avoid high tax rates, and one of them is by working and investing less.
REHMHoward, do you agree with that?
GLECKMANYeah, I think, I think, is a general matter, if you want people to do more of something, you should make it cost less, and one way you do that is you tax it less. If you want them to do less of something, you tax it more. So I think that, that lowering tax rates on anybody, particularly, as Chris said, high income people, will increase their incentives to work and save. How much is a matter of some dispute. I think the sign, everyone agrees on the sign, but I think we don't agree on how much. So, so I think as a general matter, yes, it's true.
GLECKMANWhether or not it's worth the tradeoff depends a lot on what you believe the government -- whether or not you believe the government's spending money on the right things. If you do, well, that has to be paid for by someone. And in a progressive tax system, the largest amount of that would be higher income people.
REHMHere's an email from Tom in Ann Arbor, Michigan. Please discuss the marginal tax rate. Is it not true that if, for example, someone in the top tax bracket is not paying the top tax rate of 36.9 percent on all their income, do they not pay that tax rate on only a small portion of their income. Howard.
GLECKMANThat's, that's correct. We have these tax brackets, and you pay, whoever you are, you pay that tax rate for the amount of money in that tax bracket. The marginal rate is the interesting one. I think that's really what Chris is talking about. It's the rate you pay on that last dollar of income that's the largest driver of your decision on whether to save or invest or work. So the marginal rate does matter a lot.
REHMAll right, and here's a tweet from Peter for you, Richard. Who says, section 1031 of the tax code exchanges are highly unlikely as a reason for Trump's low or no federal income tax rate. Do you have any examples?
RUBINI don't have examples, because we haven't seen his returns. I'm just positive that one reason why he might be able to, as he's purchasing additional properties, be able to defer the gains on past properties. That would matter in the years in which he's doing that because he wouldn't have to necessarily realize income. It's not exactly clear to me how often he has or hasn't used that in particular.
REHMTell me this. If Donald Trump were to be elected President, would his taxes become public knowledge?
RUBINThat would be up to him.
EDWARDSI mean, no. I mean, personal and corporate taxes are private, and there are very large penalties for any IRS employee divulging, you know, details of any individual returns, of course.
REHMBut haven't we had every President in my lifetime, at least, release those tax returns?
GLECKMANThat's correct. There's no law requiring it, but they do it. Interestingly enough, Mr. Trump says that he will not release his returns. Sometimes, he says that he will not release his returns because he's under audit. In fact, every President is automatically audited by the IRS. That is in the law. And they do release their tax returns. So, it's not only not unusual for this to happen, it would be extraordinary for a President to not release his returns because he was being audited.
REHMWell, here's a question from Walter in North Carolina. You're on the air.
WALTERHi Diane. My question is if Donald Trump were elected President, in the future, would he still be liable for past indiscretions? You know, like criminal prosecution if it was found out he had cheated on tax returns?
GLECKMANSure. There's a statute of limitations. I don't remember what it is. Is it eight, nine...
RUBINWell, it's three years from that date you file, but, you know, if you're actually doing criminal tax evasion, they can waive that.
GLECKMAN...yeah, so, absolutely. On the other hand, he would appoint the IRS commissioner and he would appoint the Attorney General.
REHMNow you all are laughing. It's not a funny matter, I must say. Here's an email from Steve. Are Trump's income taxes about his corporate taxes, personal taxes, or both? Is he under audit personally or corporately? I never hear this clarified.
RUBINOkay, so he released a letter from his tax lawyers back in the spring. And it said the following. It said your personal tax returns are under audit -- have been under audit since 2002. The years from 2002 through 2008 are closed. Those personal returns are, essentially, the amalgam of all of his -- many of his businesses. Which are structured as, as Howard said, as partnerships or as other kinds of companies that are called pass throughs in the tax -- in the tax world.
RUBINAnd what it means to be a pass through is basically your partnership files a return, and then the income passes through to the individual tax return. So it's not taxed at the corporate level. It's taxed all together combined on the individual's returns. So as best as they've explained it, and again, that's what we have to go on, he's being audited on -- it's not clear what subject, what sub-category, but on something either on the personal side or the business side.
RUBINIt's all combined on his return. He's, you know, released pictures of himself standing, or sitting with his giant stack of tax returns. And that's likely not just his personal, but it's all of the partnerships that Howard was talking about before.
REHMI know you've been writing about this for a while, Richard. Tell me about the public response you've received in writing about specifically, Donald Trump's taxes.
RUBINI think, you know, people are interested. I think, as with anything about Trump, the public reaction depends on one's opinions of Trump. So, you know, Trump supporters are -- will defend him, and Trump opponents will look for something nefarious in there.
REHMSo you're saying that it doesn't matter.
RUBINWell, I'm -- I don't know. It's hard -- I don't know what, like an undecided voter thinks. I mean, the polls have shown pretty clearly that the public would like him to release. But that doesn't -- that's sort of a -- the secondary question then is how important an issue. Are there people out there who would vote for him if he -- but only if he releases?
REHMAnd you're listening to "The Diane Rehm Show." What do you think, Howard? How important is it that Donald Trump release his taxes?
GLECKMANSo I think it would be very useful information. It is important. The idea that he's sort of playing by his own rules again is troubling. But let me say, I'm a little troubled by so much focus on his tax returns. I'm a tax policy geek, I care about the tax policy proposals that Trump and Clinton have made. And I'm afraid that what's happening is we're focusing so much on his tax returns, we're not paying as much attention as we should on what kind of a tax proposal he's making and what kind of tax proposal Mrs. Clinton is making.
GLECKMANThat's what's going to matter to all of us. What kind -- what the tax system is going to look like in a Trump administration or a Clinton administration. And like so much of this campaign, we're allowing ourselves to get distracted by an issue that I think is less important.
REHMAnd how do those proposals differ or how are they the same?
GLECKMANThey could not differ more. It's really extraordinary when you look at this choice that Americans have. Mrs. Clinton would raise taxes significantly on very high income people. Raise taxes, we don't -- we haven't, the Tax Policy Center hasn't finished this work, but by a relatively small trillion dollars, a couple trillion dollars over 10 years. And use that money to pay for tax programs and other programs aimed at middle income and lower income people. Mr. Trump, on the other hand, would dramatically reduce taxes for everybody.
GLECKMANAs Chris mentioned, by doing this significant increase in the budget deficit, which we would have to pay for somehow. His tax cuts would be targeted largely towards high income people and businesses. So it's a very different choice. It's a very dramatic choice between these two candidates.
REHMAnd Chris, when you think about that huge deficit, that the Trump plan would create, how do you react?
EDWARDSWell, I think he should -- he ought to propose, and Hillary Clinton ought to propose ways that they're going to deal with the giant increase in entitlement spending. We've got federal deficits rising up to a trillion dollars again in a few years, and neither candidate is talking about that. I do credit Trump for proposing a pro-growth tax reform plan, meaning that, you know, we've had very low growth the last seven years since the last recession, the slowest recovery since World War II.
EDWARDSUS productivity is low, which means that workers' wages aren't rising very fast. We need to do something about that, and I do give Trump credit for proposing a tax plan to increase the efficiency of the economy.
GLECKMANChris and I can probably debate this on a whole other show. I think it would be a pro-growth tax plan if he paid for it. Because he's not paying for it, because of the significant increase, an historic increase in the federal budget deficit, interest rates would go up and most, if not all, of the growth benefits of his tax plan would disappear.
EDWARDSI don't agree with that. I think, I think both tax cuts and spending cuts would be good for the economy and I, you know, I would hope that -- I think if Trump was President, you know, the tax plan that ultimately passed would be basically designed by the House Ways and Means Committee and Speaker Paul Ryan. And I also think it would give Paul Ryan a chance to reform entitlement programs, which is really what he is in Congress for. So, I worry with Miss Clinton, if she's President, there will be four more years of gridlock. And there will be no forward progress in any of these economic problems.
GLECKMANI, first of all Chris, I think that, that it's certainly true that if you had a program of tax cuts and spending reductions, if they were the right spending reductions, you could get growth. But he's not proposing any spending reductions. In fact, he's proposing spending increases. And as you suggested, he's proposing to balance the budget. He can't do all these things. So the problem is that he's, he's, he's proposing an economic plan that is impossible. So you can believe what Chris does.
GLECKMANWhich is well, if he wins, the House Republicans will write his plan for him. Or you could believe that what he's proposing is unrealistic and impossible and in fact, we would end up with the same kind of gridlock.
REHMHoward Gleckman, Richard Rubin, Chris Edwards. Well, it's going to take a while before we know who is going to create tax policy. I want to thank you all so much for being with us. Thanks all for listening. I'm Diane Rehm.
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