UNIDENTIFIED PERSON: This is PLANET MONEY from NPR.
SARAH GONZALEZ, HOST:
You read it. We read it.
JACOB GOLDSTEIN, HOST:
I read it.
GONZALEZ: We are talking about The New York Times article on President Trump's taxes.
GOLDSTEIN: The article that said he's paid little to no federal income tax in many, many years in recent history. Trump himself has said he is smart for not paying taxes. And clearly, he has lots of clever people working for him to figure out how he can avoid paying taxes. But also, part of the reason he has paid so little in taxes is you pay taxes on profits. But according to The New York Times, his businesses lost so much money that he often didn't have to pay any income tax 'cause of the losses.
GONZALEZ: And when you don't pay income taxes, even if it's because of totally OK and legal exemptions and deductions or losses or credits in the tax code, what this means is that zero of your income is going to the U.S. military or to roads or to any of the things that income tax dollars fund.
(SOUNDBITE OF MUSIC)
GONZALEZ: Hello, and welcome to PLANET MONEY. I'm Sarah Gonzalez.
GOLDSTEIN: And I'm Jacob Goldstein.
GONZALEZ: Today on the show, the unexpected upside of losing a billion dollars and also the wealth managers who advise the ultra-rich on just how they can avoid paying taxes.
GOLDSTEIN: And one other thing - we're going to talk about this special committee in Congress that apparently has been investigating whether Donald Trump should have gotten a $73 million tax refund. They've been investigating this refund for nine years now. What even is this committee that is out there in Congress investigating tax refunds?
(SOUNDBITE OF MUSIC)
GONZALEZ: All right. There are lots of different types of taxes, and the story this week is about Trump's federal income tax. And for most of the time that the U.S. has existed, there was no federal income tax. States and local governments, they had a property tax - there was that. And there were federal taxes and tariffs on things, like tariffs on imported goods, taxes on alcohol; the federal budget was significantly funded by alcohol taxes. But these taxes and tariffs on food and clothes and booze meant that poor people were spending a greater percentage of their incomes on taxes than rich people. So working people start going like, no, no, no, no, no, this isn't fair.
ISAAC MARTIN: Before the 1890s, yes, workers were really angry that so many rich people were escaping more or less tax free.
GONZALEZ: Isaac Martin is a professor at the University of California, San Diego, and he specializes in taxation and the politics of taxation. And around the 1890s, Isaac says, workers started pushing for an income tax on the wealthy so that the wealthy pay their fair share. And sort of amazingly, they got one. In 1913, they actually managed to get a constitutional amendment to create the income tax. At the beginning, it was just a tax on very rich Americans. And almost immediately, on basically Day 2 of the income tax, rich people start looking for ways to avoid paying some of it. The deductions, the exemptions, the workarounds - they start creeping in early.
MARTIN: They're creeping in at the beginning. And they've just - they kind of gradually accrete over time like barnacles on a ship.
GONZALEZ: Today, there are all kinds of weird and small and super specific provisions that apply to, like, the tiniest subset of people. Like, there was this one that just happened to apply to one person in the entire country, this Hollywood producer named Louis B. Mayer. Like, how lucky was that guy, right? And all over the tax code, income tax or not, there are these sweet tax deals. Like, there's apparently a tax on arrows. And in 2008, Congress worked in a deal for some arrow makers.
MARTIN: Lower taxes for manufacturers of toy wooden arrows relative to manufacturers of other kinds of arrows.
GONZALEZ: Toy wooden arrows specifically.
MARTIN: Yes, a specific provision was put in that said - but if they're toy arrows less than this in diameter, intended only for play...
GONZALEZ: Made out of wood.
MARTIN: ...Made out of wood - yeah - then the tax is lower. I think it was like five or six different companies, basically, on planet Earth (laughter) to which this provision applied.
GONZALEZ: There have been a few times when Congress simplified the tax code, like, when they got rid of a bunch of these deductions and exemptions.
MARTIN: But each time, it happens for a brief moment partly. And then they start accumulating again as different groups lobby successfully for special provisions for their particular circumstances.
GONZALEZ: But there's this one tax provision.
The one that I - that really stands out to me is that carryforward leftover losses...
MARTIN: So that's another one that was there from the beginning, from the beginning - or about the beginning. I think it's 1918.
GONZALEZ: The carryforward leftover losses provision of the tax code has been huge for President Trump. The Times called it the background music to Mr. Trump's life - the carryforward provision. So Jacob, let's talk about what this carryforward losses provision means.
GOLDSTEIN: I'm in.
GONZALEZ: OK. So let's say you are a business, and you make a ton of money in profit this year. Well, now you're going to have to pay taxes on all of that profit, and you don't want to because you'd have to pay, like, a huge chunk of money in taxes on it. You can say, oh, but, IRS, look at last year. Last year, I had these big losses. I didn't make a profit last year. So I should, therefore, pay less taxes on all of this year's profit because of my previous losses.
GOLDSTEIN: And so part of the reason that President Trump has been able to pay so little in taxes, at least according to The Times, is because his businesses have lost so much money. They've lost more than a billion dollars. And he has used the carryforward provision, among other things, to reduce his tax bill for years and years. You know, when you have business losses, it's like you have, like, money in the tax bank that you can use to pay less taxes in the future.
GONZALEZ: Now, originally, back in 1918, when carryforward first started, if you lost money one year, you could use that loss to reduce your taxes for next year - but only for that one year.
GOLDSTEIN: And then a while later, Congress said, you know what? You can carry forward losses for two years.
GONZALEZ: Then Congress extended it further to 15 years.
GOLDSTEIN: And eventually, Congress said, you can spread your losses out. You can carry losses forward for as long as you want - forever. President Trump signed the bill that made that change into law in 2018.
GONZALEZ: And Isaac says there are good reasons to have this provision in the tax code. It can be helpful for struggling businesses.
MARTIN: So on the one hand, you kind of don't want your tax system to bankrupt a viable business just 'cause it has a bad year, right? So that's one.
GONZALEZ: So it's useful. But also...
MARTIN: But depending on, you know, how clever you are about your investments and how you go about booking what counts as a loss, there's lots of room to kind of game it with creative accounting. It is wildly open to abuse.
GOLDSTEIN: So carryforward is sometimes a reasonable, useful thing and sometimes something that people and businesses abuse to pay less taxes than they should. And there are people at the IRS whose job it is to figure out, for every tax return that uses this provision, you know, which is it? Is this reasonable, or is this abuse?
GONZALEZ: But Isaac says the funding that pays for the IRS to enforce carryforward rules and the rest of the tax code, it has been cut for years.
MARTIN: It's been - you know, a pretty substantial bloc of the Republican Party in Congress has lined up behind the idea of really depriving the IRS of teeth, especially the enforcement arm that goes after the rich.
GONZALEZ: And just, like, think about how expensive it can be to audit the taxes of the ultra-rich. Rich people do not have simple, straightforward tax returns. They have a ton of paperwork, fancy lawyers.
MARTIN: I mean - so look at the story we read in The New York Times about the president's taxes, right? And it was a picture that they had to assemble by looking at hundreds of different tax returns for hundreds of different entities. Now, imagine having to do that for every - even for 1 in 10 rich people in the United States, right? Obviously, it can't be done.
(SOUNDBITE OF MUSIC)
GONZALEZ: Except there is one congressional committee that specifically looks into the super-rich but only in some cases.
GOLDSTEIN: But one of those cases is the case of President Trump. Sarah, there was this one paragraph in The Times story - I mean, there were a lot of paragraphs in The Times story, and a lot of it was interesting. But there was one paragraph in particular that, really, I wanted to understand better. So the paragraph was related to this $73 million tax refund that Donald Trump apparently got in 2010 and that he and the government are still fighting over.
GONZALEZ: OK. I'm going to read this paragraph. It says, quote, "Refunds require," - blah, blah, blah - "an opinion of the Congressional Joint Committee on Taxation," - blah, blah, blah - "and tax law requires the committee to weigh in on all refunds larger than $2 million to individuals."
GOLDSTEIN: So what this paragraph is saying is there is a committee in Congress that has to give an opinion every single time the IRS is about to send some rich person a multimillion-dollar tax refund. And so I read this, and I thought, like, why? You know, what is going on here? I have questions. So I called Dave Noren. He's a corporate lawyer who used to work at this committee, the Joint Committee on Taxation. And he told me this is not a normal kind of congressional committee. You know, it doesn't write laws. It doesn't hold hearings where lawmakers ask questions that are really more like comments.
DAVID NOREN: And the joint committee staff is a nonpartisan expert staff of economists, lawyers, accountants.
GOLDSTEIN: So it's like Congress' team of tax nerds.
NOREN: That is a good way to put it. That's (laughter) exactly right.
GOLDSTEIN: Mostly, the nerds on this committee figure out what different changes to the tax code would mean for the government and for the economy, you know, how different potential tax tweaks would work. But a few of them go into work every day and review giant tax refunds that the IRS is about to send out.
It's interesting because it's so one by one, right? I guess you don't think of Congress as doing anything on, like, we're going to look at every big tax refund that goes out in America. But that is what they're doing here.
NOREN: And I agree. It is pretty unusual. It might be unique in terms of something that the Congress would get involved with.
GOLDSTEIN: Congress got involved with this back in the 1920s, basically because they didn't trust the person who was overseeing the IRS - the Treasury secretary, Andrew Mellon. Mellon was one of the richest men in America, also one of the biggest taxpayers in America, had all these business interests that he held on to while he was Treasury secretary.
And so Congress was like, wait - you are the boss of the IRS, and you owe all these taxes, and you have investments in all these businesses that the IRS is supposed to be taxing. That seems very shady. You know, we want to make sure that you're not just having the IRS send you and your pals massive tax refunds. So what we, Congress, are going to do is we are going to pass a law that requires this joint committee to review big refunds. Congress basically said, tax nerds, keep an eye on these rich guys and their refunds.
GONZALEZ: And so here we are almost 100 years later. And the tax nerds, they are still keeping an eye on these guys. And that's why in 2011, Trump's refund made its way to this committee.
GOLDSTEIN: And apparently, the committee reviews hundreds of these refunds a year, so it's, you know, routine - sort of. But there are a couple of things in this case - in the case of Donald Trump's giant refund - that are unusual. One unusual thing is, typically, the committee reviews the refunds before they get sent out to taxpayers.
GONZALEZ: Makes sense.
GOLDSTEIN: Yeah, you would think, right? You would think. But there is this special corner of the law. And it actually applies to sort of the twin, Sarah, of what you were talking about earlier in the show - the twin of the carryforward provision - right? - where you can carry forward losses. The twin is carryback.
Here's how carryback works. If you lose money in the year you're filing your taxes for now, instead of carrying those losses forward, as you do in carryforward, you can look back to the past. You can say, look - a few years ago, I was making tons of money. I was, you know, on "The Apprentice," and I paid tons of taxes. And so what I want to do is I want to carry my losses from the present back into the past, and I want you to give me a refund for all of those taxes I paid a few years ago, right? So that is what President Trump, in fact, was doing in this case when he got this giant $73 million refund. And the special provision of the law that applies here is actually something they call a quickie refund.
GONZALEZ: It sounds so innocent, well-intentioned.
GOLDSTEIN: It's such a cute - right? - just cute little $73 million tax refund. And what happens with a quickie refund is the IRS is like, OK, we will send you the refund before we've done a thorough evaluation of your claim, and you have to promise that if we ultimately decide that your claim for this refund was not valid, you're going to give us back the money. So that's what happened here. That is thing No. 1 that was unusual.
GONZALEZ: The quickie refund for $73 million.
GOLDSTEIN: Yes. OK. So thing No. 2 that is unusual is just how long it has taken to figure out whether the refund was legit - you know, whether the president, in fact, qualified for the refund under the law.
NOREN: So typically, the joint committee clears refund reviews in about three weeks, maybe a little bit more than three weeks in a, you know, kind of standard run-of-the-mill case.
GOLDSTEIN: Dave says that some really complicated cases might take a few months to figure out. But the president's case is still unresolved, and it went to the committee nine years ago - years. Dave says he never saw anything take anywhere near that long when he worked at the committee.
NOREN: I never saw years happen.
GOLDSTEIN: OK. So a case that went on for years would be very unusual in your experience?
NOREN: That's fair to say, yes.
GOLDSTEIN: And, you know, it makes sense that once Donald Trump becomes President Trump, the case would become exceptional and more complicated and take longer. But this case was already going on for years before that happened, and so it's not entirely clear why it's taking so long. So, OK, we've been through what's going on with the president's case and also, where does this weird committee review come from? The one last thing I wanted to ask Dave was, does it even make sense to have a special congressional committee review, you know, individual tax refunds?
You sort of worked on both sides, right? You were describing working for clients whose refunds are held up by the committee. You've worked on the committee holding up people's refunds as you study them. Do you feel like it's useful?
NOREN: I do. I do. I think just from a revenue perspective, the taxpayer gets huge bang for the buck out of the JCT refund review process. It costs almost nothing to run. It's - you know, as I said, it's just a few people, and they can be counted upon to spot millions and millions and millions of dollars of, you know, potential mistakes.
GOLDSTEIN: Sure. The spotting is just saying, hey; you know, look. This million here, million there - this shouldn't be going out for this, this and this reason. And the IRS would say, oh, yeah, you're right. Thanks for pointing that out. I mean, that's a basic.
NOREN: That's right.
GONZALEZ: After the break, professional gamers of the tax system.
(SOUNDBITE OF NIGEL RIVERS' "THE FUNKY LOWDOWN")
GONZALEZ: One last interview - it's a little different from the rest of the show. It's an interview with Brooke Harrington, who is a professor of economic sociology at Dartmouth College.
BROOKE HARRINGTON: First of all, I want to say this is kind of a depressing set of circumstances for Americans to listen to. And if it's any small consolation, the kind of problems we're talking about here in which revenue collection agencies like the IRS are terribly underfunded and kind of legally and financially outgunned by the ultra rich. That's true all over the world.
GONZALEZ: You, Brooke, have spent your career interviewing professional gamers of the tax system.
HARRINGTON: (Laughter) I do. It's worse than that, actually. It's not just professional gamers of the tax system. It's professional gamers of the law.
GONZALEZ: Brooke has spent the past 13 years studying the experts who advise the ultra rich all over the world, the people who help the rich figure out all the tax workarounds and deductions and their investments. They're called wealth managers. Basically, they're, like, some bankers, some lawyers, some accountants. But also, Brooke says, sometimes it can be just like a regular old English professor who comes from a rich family and knows how to make rich people feel comfortable.
HARRINGTON: People who are wealth managers become, by necessity, so intimate with the lives of their clients. I mean, you have to know about all the skeletons in the closet if you're really going to protect a family fortune. And so that means if someone is that trusted, they end up getting invited to the family weddings. And that often means private islands and private jets and a very luxurious way of life.
GONZALEZ: And to understand this world, Brooke, who is a sociologist, a professor, she actually became a wealth manager herself.
HARRINGTON: Yes, I did because that's really the only way to study closed professional groups.
GONZALEZ: You - when you say you became a wealth manager, like, could you advise me how I can avoid paying taxes?
GONZALEZ: Are there, like, one or two ways that, like, every rich person avoids paying taxes?
HARRINGTON: The question that you're asking is the sort of question that a middle-class person would ask.
GONZALEZ: Brooke just said I am so middle-class that I don't even know what question to ask about how rich people avoid paying taxes. I was just thinking way too small. I was thinking about, like, the United States.
HARRINGTON: If you're super rich, nobody's national borders matter. They're irrelevant. And as one of the things I learned from interviewing wealth managers is, like, the nation-state is nothing to them. It's a triviality in a way that's unimaginable to people who aren't ultra rich. And I'm being totally serious about this.
GONZALEZ: Fun, right (laughter)? OK, if you are one of these ultra-rich people, we want to know what your life is like. You know where to find us. We are everywhere - @planetmoney - Instagram, Facebook, TikTok, Twitter - @planetmoney.
GOLDSTEIN: Today's show was produced by Liza Yeager and James Sneed, with mixing help from Gilly Moon. Karen Duffin helped us understand some of the tax provisions. Irena Hwang fact-checked the show. Our editor is Bryant Urstadt. And Alex Goldmark is our supervising producer.
GONZALEZ: I'm Sarah Gonzalez.
GOLDSTEIN: I'm Jacob Goldstein, author of the new book "Money: The True Story Of A Made-Up Thing." This is NPR. Thanks for listening.
(SOUNDBITE OF LLOYD RICHMOND'S "FATBACK")
NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.