Trump's Tax Returns Show What Sort of Tax Reform We Need

The recent release of former President Donald Trump's tax returns has triggered two seemingly contradictory reactions. Some people are eager to point out that considering his many heavy losses, Trump might not be as good as legend has it at turning profits. On the other hand, other folks complain about just how few actual dollars Trump paid in taxes.

There is an obvious connection between these different interpretations. Once again, we have evidence of just how poorly many Americans grasp basic tax facts.

Now, I agree that our tax system should be revamped. This system is a nightmare of double taxation of income and grotesque horizontal inequities in which—thanks to a labyrinth of politically motivated tax breaks and credits—taxpayers earning the same incomes don't pay the same amount of taxes. The result is a system that penalizes work, saving, and investment and in turn dampens economic growth.

As such, I would first and foremost eliminate all tax breaks and other preferences that tilt the playing field in favor of politically connected interest groups. Our tax code would be radically improved if it weren't used by politicians to subsidize certain behaviors while penalizing others. Incentives such as those to buy electric cars and bicycles, or to invest in (insert preferred industry here) are unfair, distortive, and often fail to achieve their stated goals. They should have no place in our tax code.

In addition, these special-interest tax provisions mostly benefit the well-connected taxpayers who lobby for their creation or for their extensions. These provisions also benefit politicians—Democrats and Republicans alike—who are rewarded for their cooperation with campaign contributions and votes. The clear losers from this unhealthy marriage are taxpayers who must comply with an out-of-control, complicated 2,600-page tax code, often without the help of a professional accountant.

Yet for all the many problems with our tax code, recent viewers of Trump's tax records have been complaining about the wrong provisions, such as the fact that it allows businesses to smooth out their tax bills over multiple years. Indeed, in the current system, a business that earned a $500,000 profit in 2020 but also suffered $500,000 annual losses over the previous two years and is still losing money can average its profits by carrying forward those losses. This provision makes total sense. You don't want startups and risk-taking entrepreneurs—which in this scenario are still losing money—to fail because of the burden of taxes in a volatile economy or to needlessly face the higher tax rates paid by well-established businesses.

Blaming the unfairness of our system on Trump's use of such loss-carryforward provisions, as if these are illegitimate or fraudulent, is silly. It becomes laughably hypocritical when it is offered by the same people who never stop pushing for bigger tax credits for their favorite causes.

Trump's ability to deduct his business expenses has spurred additional outrage. But, for one thing, commentators seem oblivious to the fact that it isn't easy to tell from the outside which business expenses are legitimate and which aren't. Might some of these expenses be fraudulent? Of course. And it's worth noting that while Trump hasn't ever been found guilty of evading his taxes, some of his businesses have. The bottom line is that as long as Congress continues to tax businesses, legitimate expenses must be deductible, but these will often be hard to tell from illegitimate ones. As such, there will always be some cheating. But an alternative system would be disastrous.

I wish the release of the former president's tax returns had triggered a conversation about the need for tax reform. Our tax code is inefficient—no matter how you define this term—because it is complicated. It is conducive to cheating, unfairness, and economic distortions because it is complicated. Making all these issues go away means simplifying the tax code.

For that, legislators will have to acknowledge that there are too many loopholes, deductions, and exemptions. That issue is due in part to the fact that Uncle Sam often taxes the wrong income, which is an even bigger problem. These discussions won't happen if all partisans are focusing on is whether a particular deduction should be allowed while another shouldn't, or whether people they don't like should be taxed even though they made no money.

This bickering won't reform the tax code, leaving taxpayers to struggle each year during tax season.

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