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A big and important story about America’s failing tax system lurks in the revelation (which Donald Trump seemed to confirm in Sunday’s debate) that he had tax losses that could allow him to spend almost $4 million a month for nearly two decades while paying no federal income taxes.
Trump is part of a growing wave of people who enjoy lavish lifestyles, but pay little or no federal income taxes, my analysis of the official tax data going back two decades shows. There are enough of them that they even have their own IRS nickname (see below).
Thank Congress for this awful state of affairs: Members have responded, as Trump says, to campaign donations by giving donors what they want. That Trump and others can live large while paying little or no income tax helps explain why so many Americans feel oppressed by their tax loads.
Not only do they bear the burden of supporting the United States of America, they also can’t help but notice that so many others enjoy lifestyles unimaginable just two generations ago.
The taxes paid by most Americans subsidize those who do not pay – including a strikingly high number of affluent, not poverty stricken, Americans. Let’s take a look at the latest IRS data, which I have analyzed annually for more than two decades.
The Rise of the Negative-Income Household
In 2014, the latest year for which we have data, more than two million of the 148.6 million tax-filing households reported negative incomes. The number of such households has been rising for years. In 1994 it was 0.8% of income tax returns, but in 2014 it hit 1.4%. That's one in 73, up from one in 125.
Some of these households have one-time losses, usually from failed business. But many must be wealthy, too, benefiting from liberal tax avoidance laws set by Congress.
My detailed analysis of the official data shows that those who reported negative incomes on average are wealthier and enjoy more cash flow by far than the average American.
Some surprising facts:
- More than a fourth of these non-taxpaying households had paying jobs in 2014.
- These households had vastly more investment income than all but the top half of 1% of all households.
- One in three negative-income households reported receiving taxable interest, compared to 29% of all taxpayers. The average amount they reported was $6,939. For comparison, those making $75,000 to $100,000 in 2014 reported average taxable interest of just $860.
What we do not know is how many of these are people reporting negative income just once – and how many, like Trump, have reported negative income year-after-year, despite huge incomes that they collect free of income tax.
Trump benefits from liberal rules set by Congress that let him use losses from mismanaging his casinos, airline and other businesses to offset other income, such as licensing fees for use of his name, book royalties and payments for his television show “Celebrity Apprentice.”
Because in 1995 his cumulative net operating losses or NOLs totaled $916 million – and tax rules allow new NOLs be used for two past years and 15 future years – Trump could live tax free as long as his income was under $4 million per month. The 1995 tax return showed that Trump's actual 1995 income was about $1.6 million per month.
Today, Trump is the proud poster boy for that slice of the American pie served to taxpayers who enjoy huge incomes, but pay little or no income tax. Not paying taxes, Trump told us in the first Presidential debate, “makes me smart.”
HINTs: Rich Negative-Income Households
Now let's look at people who report large positive incomes from work and investments, but live free of the income tax. Many of these individuals, like Trump, benefit from liberal rules on net operating losses that can be used over an 18-year period to offset otherwise taxable income.
In 2014 the IRS processed 148.6 million tax returns of which 6.2 million showed incomes of $200,000 or more. These are the top 4%. As directed by Congress, the IRS refers to those making $200,000 or more as high-income taxpayers.
Among these prosperous taxpayers, 10,900 paid nothing, my analysis of IRS Statistics of Income Table 1.4 shows. That means about one in 500 high-income taxpayers (about 0.2% of the group) paid no income tax even though most reported earning money from work and had much larger taxable interest income than Americans as a whole.
That’s also up from 5,650 such households in 2002, though it’s important to keep in mind that the $200,000 threshold is not adjusted for inflation so the figures for 2002 and 2014 are not perfectly comparable.
The IRS calls these wealthy negative-income households HINTs, short for High Income, No Tax. Trump is an extreme example of a HINT.
When you get to even richer households, Donald Trump territory, you still find negative-income taxpayers: The 410,300 tax households reporting incomes of $1 million or more in 2014 had an average income that was more than $3.3 million. But 444 of these million-dollar-plus households – about one in 900 – paid no income tax.
The Rich vs. the Rest
In contrast to growing affluence at the top of the ladder, income growth has virtually stopped for most Americans. Adjusted for inflation, the bottom 90% of Americans reported average income in 2014 that was just 1% more than in 1967. That $328 increase after 47 years would be hard to notice, especially since so many people work more and earn less, thanks to often-subtle changes in government policy regarding taxes, investment, unionization, off-shoring and the social safety net.
In addition, Congress since 1981 has replaced tax policies that discouraged lavish personal spending while simultaneously encouraging the domestic investment that creates jobs in America. My book “Perfectly Legal” explains much of this at length.
For the vast majority of Americans, average tax rates have changed little over the last half century. The average, or effective, tax rate is the share of income paid in federal income taxes. Add in higher Social Security taxes and many middle class voters send a larger share of their income to Washington today than they did in the 1960s and 1970s.
Now let’s fold in some historical perspective in two steps – one statistical, one social and political.
Back in 1961 the 398 highest-income taxpayers, measured in today’s dollars, enjoyed an average income of $16.3 million. They paid 42.4% of their income as income tax.
Jump forward to 2013 (while the IRS has released data for all taxpayers through 2014, the annual report on the 400 highest incomes in tax returns is only available through 2013). By that year, the top 400 enjoyed more than 16 times as much income as the same statistical group did back in 1961, averaging $264.9 million. However, their average tax rate was almost cut in half to 22.9%.
That rate would have been around 17%, but for President Obama persuading Congress to raise the top marginal tax rate from 35% to 39.6% (for taxable incomes over $400,00 for single filers and $450,000 for those who are married, filing jointly).
How often do you hear politicians running for Congress or the White House promise that everyone with income will pay taxes and that they will pare down the number of households reporting negative incomes? How many mention that most of the two million households with negative incomes – and thus no tax bills – are on average much richer than the typical American family that actually pays income taxes?
The Donald Trump revelations may have done us all a favor by shining a bright light on this almost hard-wired flaw in the American tax system. Hillary Clinton and Donald Trump both say they will work to cut tax loopholes, but their plans say nothing about perennial negative-income filers.
The start of a new term with a new president is when we have the best chance of really addressing this issue. Start asking your congressperson and senator what they're going to do about those who live well and pay no federal income tax.
Pulitzer Prize winner and recipient of an IRE medal and the George Polk Award, David Cay Johnston is author of five books. His new book, The Making of Donald Trump, was published on August 2, 2016. His next one will be The Prosperity Tax: A New Federal Tax Code for the 21st Century Economy. Johnston is a Distinguished Visiting Lecturer at Syracuse University College of Law and Whitman School of Management, and also writes for The Daily Beast and Tax Notes.