What We Learned From Just Two Pages of Trump’s Tax Returns

In a speech delivered in Gettysburg, Pennsylvania on a Saturday morning in October 2016, then-candidate Donald Trump mapped out an ambitious agenda for his Presidency. The ‘Middle-Class Tax Relief and Simplification Act’ featured prominently among the bills he pledged to pass in his first 100 days. In his campaign speeches, he promised tax relief for middle-class families that would raise the after-tax income of workers and help them achieve the American dream.

The mysterious release of just the first two pages of now President Trump’s 2005 tax return may have raised more questions than it answered, but it provided deep insights into his proposals to reform the personal income tax. It revealed in stark terms just how much the President himself – and other wealthy business people like him – stands to gain from the main tax changes he proposes. It throws cold water on his campaign promise that his tax reforms are designed to benefit working families.

The alternative minimum tax – the AMT – is a backstop that is intended to assure that wealthy individuals who hire tax accountants to aggressively pursue loopholes in the tax code (not available to the average taxpayer) do not end up paying little or no income tax. The AMT can certainly be improved – it now inadvertently hits some families with many children who live in high-tax states. But President Trump has called for its outright repeal. Now we know why. The first two pages of his 2005 tax return reveal that he was able to write off $103 million of his nearly $153 million income, reducing his tax bill to just $5.3 million – a mere 3.5 percent of his income. This is precisely the situation that the AMT was meant to address – to require millionaires to pay their fair share of taxes. Once the AMT kicked in, Mr. and Mrs. Trump paid a little more than $36 million in income taxes – an effective tax rate of 24 percent. Repeal of the AMT, as he proposes, would have saved the President $31.3 million in taxes.

And where did the $103 million in tax write-offs come from? The first two pages of the President’s IRS 1040 form do not provide any detail, but they illustrate the general principle at work here. The Trump organization consists of a myriad of partnerships and other so-called ‘pass-through’ entities. Pass-through income is income from a business such as a partnership that is not a corporation and not subject to the corporate income tax. The business income ‘passes through’ to owners of the business, who then pay individual income taxes on it. Losses from these businesses also pass through to the business owners, allowing them to use these losses to reduce their taxable income, as Trump did in 2005. A key tenet of President Trump’s tax reform proposal would reduce the tax on pass-through income to, at most, 15 percent. This is far below the top tax rate of 39.6 percent that currently applies to both wage and salary income and to pass-through income. This change to the tax code does nothing for the vast majority of Americans whose main source of income is the wage and salary income reported to the IRS on a W-2. But for the President and his cohort of millionaire real estate moguls, hedge fund partners, and private equity firm owners whose businesses are organized as partnerships, it will be a windfall that will substantially reduce their taxes.

Finally, President Trump promises to use tax simplification to reduce everyone’s taxes. By tax simplification he means a reduction in the number of tax brackets from seven to four. But there is nothing that makes it any simpler for taxpayers to look up what they owe in a tax table with four brackets instead of seven. Reducing the number of tax brackets has nothing to do with making it easier for ordinary families to pay their taxes and everything to do with reducing the taxes paid by the richest Americans. Some middle class families will see their taxes reduced. But the big time winners are the wealthiest taxpayers who reap huge gains in their after-tax income from Trump’s proposed reduction of the top marginal tax rate from 39.6 percent to 25 percent.

Trump’s 2005 tax return shows that the reforms to the personal income tax that he proposes benefit the wealthy, not middle class families. Tax reform on the ‘Friends and Family Plan,’ will benefit him personally, his family, and his wealthy friends and partners. But it will provide little to nothing in tax relief to the working families he claims to champion.

This article originally on Huffington Post.

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