Taxes

Would Trump Get 'Killed' by the House Tax Bill? Um, No

"It kind of seems like it's specifically designed to help him."

"My accountant called me and said 'you're going to get killed in this bill,'" Trump said, implausibly.

Photographer: Drew Angerer/Getty Images

While chatting with a group of Senate Democrats earlier this week, President Donald Trump said something curious about the House's Tax Cuts and Jobs Act. Here's the NBC News version:

"My accountant called me and said 'you're going to get killed in this bill,'" the president said during a phone call from his trip in South Korea. He was apparently trying to increase Democratic support by claiming the bill would hurt wealthy taxpayers like himself, making the point that only the repeal of the estate tax would provide him any benefit.

My initial impression when I read this was that the president's accountant did not actually call him and say the legislation would increase his taxes, because it won't. Given what we know about the House version of the tax bill and the president's attitude toward factual accuracy, that's certainly the Occam's-razor explanation. 1

The legislation is, on the whole, quite generous to the wealthy. Every distributional analysis released so far shows that those with very high incomes would, as a group, gain from the envisioned changes, and the Urban-Brookings Tax Policy Center analysis estimates that those in the top 0.1 percent of the income distribution will see bigger tax cuts -- in both dollar and percentage terms -- than any other income group over the next decade.

But analyses of the House tax bill also indicate that people with the same incomes can experience very different outcomes depending on where they live, how they make their money, how many kids they have and so on. Despite the big overall gains that those in the top 0.1 percent will reap from the legislation, 30.8 percent of those in that income group would see their taxes rise by 2027, according to the Tax Policy Center. So I really did wonder for a moment if perhaps Trump really did talk to his tax accountant, who really did inform him that something unique about his tax situation made the legislation bad news for him.

Then I did some calculating.

First, just for fun, I analyzed what the Tax Cuts and Jobs Act would have done to Trump's predecessor's taxes. In 2015, Barack and Michelle Obama enjoyed a presidential salary of $393,454, plus $56,069 in business income, all stemming from book sales. They paid $78,204 in income taxes. 2 Under the House plan they would no longer be able deduct their $18,390 in state income taxes and would be able to deduct only $10,000 of their $30,167 in local property taxes, but according to Marketwatch's handy Trump Tax Calculator, the lower rates and Alternative Minimum Tax abolition envisioned in the bill would still bring their income tax total down to $72,194, a 7.7 percent reduction. Senate tax writers are considering wiping out the state and local tax deduction altogether, which -- all else being held equal in the two bills -- would result in a $76,494 tax obligation, a 2.2 percent reduction.

Donald and Melania Trump's income is presumably much bigger and their tax situation much more complicated than the Obamas'. We can't know exactly how much bigger and more complicated because, unlike the previous eight presidents, Trump has not released his income tax forms. We do, however, have his 2005 1040 form, provided to journalist David Cay Johnston by an anonymous tipster earlier this year.

It showed almost $153 million in income, about $110 million of which was of the pass-through variety -- business income not subject to corporate taxation but simply passed through to the owner's personal return -- and much of the rest of which was capital gains. The form also showed a $103 million writeoff for business losses, which the White House described as “large-scale depreciation for construction,” leaving an adjusted gross income of $48.6 million. That and various deductions (which we don't know much about because Johnston didn't get the Trumps' Schedule A or any other forms) brought taxable income down to $31.6 million. This would have resulted in only a $5.3 million tax obligation but for the Alternative Minimum Tax, which boosted the Trumps' total federal income tax bill to $36.6 million.

The House tax bill would reduce the top tax rate on pass-through income from 39.6 percent to 25 percent, and it would abolish the AMT. If the Trumps' current income picture is anything like in 2005, they would reap huge gains from the latter change in particular. Losing the ability to deduct state income taxes and limiting the deduction for state and local real estate taxes would claw back some of those gains, but with the same adjusted gross income as in 2005 and no itemized deductions at all, my back-of-the-envelope calculation 3 is that their federal income tax bill for 2018 under the new legislation would be just $13.3 million -- $23.3 million, or 64 percent, lower than it was in 2005.

Is there anything in the legislation that could possibly cancel out this $23.3 million tax windfall? The likeliest contenders as I looked through the bill seemed to be new limitations on net operating loss carry-forwards and the expensing of business interest, which together are projected by the Joint Committee on Taxation to bring in $328 billion in added revenue over the next decade. But when I asked tax accountant Tony Nitti, a partner at the firm of WithumSmith and Brown in Aspen, Colorado, who wrote a nice explainer of these provisions in his Forbes blog last week, he threw cold water on the possibility that either would change Trump's tax picture much because:

  1. The operating loss provision applies only to corporate taxes, and the Trump family does virtually all its business through pass-through limited liability companies that would not be affected, and
  2. The rule limiting debt expenses to 30 percent of income explicitly does not apply to real estate debt, which is presumably the main kind of debt Trump has.

"Not only is there not much in this bill that would presumably hurt the president," Nitti went on, "but it kind of seems like it's specifically designed to help him."

A key example: the rules governing treatment of pass-through income, which are intended to keep people from disguising their jobs as lower-tax pass-through businesses. Here's Nitti's explanation, from another post on his blog, of how this works in real estate:

If you are not a passive owner -- in other words, you materially participate in a non-rental activity, or you qualify as a real estate professional and materially participate in your rental activities --  the House bill does not want you to be able to convert "service income" that would normally be taxed at ordinary rates -- which will continue to be as high as 39.6% -- into income taxed at the favorable 25% rate.

As a result, if you are a nonpassive owner of an entity, the default treatment of your income is that only 30% of the income is subject to the favorable 25% rate; the remaining 70% of the income is taxed at ordinary rates at a high of 39.6%.

"Nonpassive owner" fits the Donald Trump of 2005. Today, though, he's got this other job in Washington, and can pretty easily make the case to the Internal Revenue Service that he's not a real estate professional. 4 He's a passive owner whose pass-through income would all be taxed at the lower 25 percent rate (my tax calculations above factor this in). What a great deal!

All in all, it's pretty much the opposite of getting killed. And yeah, I think we can go back to Occam's razor: Trump made up that story about his accountant.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
  1. Also known as the law of parsimony, "according to which an explanation of a thing or event is made with the fewest possible assumptions."

  2. That doesn't count the $1,502 in self-employment tax and $1,766 in additional Medicare tax reported on the Obamas' 1040.

  3. I assumed that pass-through income constituted two-thirds of the total and long-term capital gains one quarter.

  4. The standard, Nitti writes, is that you spend both more than half your working time during the year and more than 750 hours on your real estate trade or business.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
Philip Gray at philipgray@bloomberg.net

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