Who’s Taxed More: Trump or a Cardiologist?

When you add up the numbers from reporting by the New York Times and the recently released House Ways and Means Committee Report on Trump’s taxes, Donald Trump paid total federal income taxes of about $1.8 million between 1996 and 2020, a 25-year period. He paid another $70 million or so between 2005 and 2007, but had all of that refunded to him when he claimed losses in subsequent years. 

All told, Trump’s income tax bill averaged $72,000 per year between 1996 and 2020. 

So, how does that compare to the 25-year tax bill of a member of what I call the “salaried rich,” affluent Americans whose incomes largely consist of a paycheck, which their employers report to the IRS on a Form W-2 at the end of the year?

Back in 1996, someone earning a salary of $320,000 who had $75,000 of payments for mortgage interest, state and local taxes, charitable contributions and various other deductible items would have taxable income of $245,000 and a federal income tax bill of just over $72,000. In 2020, someone earning a $425,000 salary with $75,000 in itemized deductions would have paid just over $72,000 in federal income tax. 

Who might have been paid a salary in that range? Anyone paid a salary in the top two percent of American household incomes. That’s several million American wage earners.

Here’s one example: A cardiologist just starting in practice in 2020 would have been paid a salary in the $425,000 range. An experienced cardiologist, of course, would have been paid considerably more. 

Cardiologists as a group are fairly rich. In 2020, over half of cardiologists reported a net worth of over $1 million. But 73 percent of cardiologists younger than 45 years old reported a net worth of under $1 million and fewer than one-third of those over 65 reported a new worth of over $5 million. Which tells us that over a 25-year period ending at retirement age, an average cardiologist would start with modest wealth and end up with a net worth somewhat shy of $5 million.

Cardiologists are doing just fine, but they’re not remotely in the same world as Trump. Between 1996 and 2020, Trump held about 1,000 times the wealth of the average cardiologist who was 40 years old in 1996. According to Forbes, Trump’s net worth stood at $450 million in 1996, rose as high as $4.5 billion in 2016 and stood at $2.5 billion in 2020. 

We don’t have a measure of Trump’s true income between 1996 and 2020, but we do know his wealth increased by at least $2 billion during the 25-year period. And that wealth increase doesn’t include his personal spending over those years, an amount likely to also be in the billions. 

How can it be that he paid no more income tax than a cardiologist did on less than $10 million in wages over the entire period?

As Professor Ed McCaffery has explained, it’s because America doesn’t really have an income tax. It has a wage tax. For wage earners, including cardiologists and even CEOs and professional athletes, it’s an efficient system. Employers withhold tax on wages and report wages annually to the IRS and, ever since the 1986 Tax Act, it’s been difficult to shelter wage income from taxation. Which means wage earners can’t avoid tax on their wages either legally, through avoidance planning, or illegally, by not reporting them. 

For the very wealthy, the rules are entirely different. The avoidance strategies used by wage earners prior to the 1986 tax reforms still are available to many whose income is derived from wealth, especially real estate magnates like Trump. 

Further, income from the appreciation of assets can be deferred indefinitely and, when assets are held until death, avoided entirely. Professor McCaffery coined the phrase for this strategy: Buy-Borrow-Die. Reporting by ProPublica exposed how America’s billionaires have used Buy-Borrow-Die to pay virtually no income tax as their wealth skyrocketed.

When it finally is taxed, much of the income derived from wealth is subject to preferential rates that top out at barely half the maximum rate that applies to wages. 

And when those with income from wealth, quite possibly including Trump, go beyond the low rates and legal avoidance strategies available to them and engage in avoidance planning not allowed under the law or simply don’t report their income, they again have advantages unavailable to wage earners. Unlike wages, income from wealth typically is not reported to the IRS by those who pay it. Which means the only way the IRS knows whether the ultra-wealthy are paying the limited amount they owe is through the audit process. Since 2010, however, the IRS has been starved of funding, with audit rates down 58% overall and 71% for millionaires. 

To sum up, unlike wages, income from wealth is tax-deferred until assets are sold or not taxed at all in the case of gain from assets passed at death, can be far more easily sheltered from tax or concealed impermissibly from the IRS with little risk of audit, and, when taxed, is taxed at  rates far lower than those that apply to wages. 

The Inflation Reduction Act, enacted last year, will hopefully begin to reverse the appallingly low rate of millionaire tax audits by adding billions to the IRS enforcement budget. It’s a small step in the right direction, but much more needs to be done. 

It won’t be easy. House Republicans voted unanimously to reverse funding for increased IRS audits of rich taxpayers. They undoubtedly will resist additional efforts, such as the Billionaire Minimum Income Tax bill, to level the playing field. And some Democrats, including Arizona’s Kyrsten Sinema, may join them, as she has previously.

Still, the fight must go on. A society with a tax system skewed as dramatically as ours is in favor of billionaires is unsustainable. We need more leaders who understand that basic reality. 

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