Think Trump’s Tax Returns Are Shocking? You Should Read the US Tax Code

The story dominated campaign coverage when it broke, yet the idea of Trump (the businessman) using massive losses to offset future tax liability should be about as surprising as a stray dog tearing into an unattended porterhouse. The real surprise would be if he hadn’t.

In writing off his losses, Trump has done nothing illegal, or even particularly creative; instead, he has done exactly what the tax code – created by politicians we elected – calls for. The real problem is that this system allows wealthy individuals to choose their own tax rates, a courtesy we do not afford to everyone else, and that Trump wants to lower rates on the wealthy in order to funnel even more tax dollars to people like himself.

For more than 30 years, sensible tax principles have been set aside in the misguided belief that putting more money in the hands of the wealthy would increase growth and investment. As the Roosevelt Institute and our colleagues at other progressive institutions have often pointed out, the U.S. tax code is filled with loopholes and carve-outs that disproportionately benefit the wealthiest firms and individuals. As a result, massive tax avoidance by the wealthy is now the rule, not the exception.

In 2013, for example, the low rate on capital gains cost the government $161 billion in revenue. Of that, 68 percent, or $109.5 billion, went to the top 1 percent. This is to say nothing of a full three-quarters of all U.S. equities held in untaxed accounts like IRAs.

The story is similar for deductions for mortgage interest and charitable contributions: The top 20 percent of earners took home respectively 73 and 84 percent of those benefits, totaling roughly $84 billion.

More specific to Trump’s case, a recent study by Treasury Department economists suggests that finance and real estate passthrough businesses like the Trump Organization pay an average tax rate of just 14.7 percent, compared to an average corporate rate of 31.6 percent. This cost the government $100 billion in 2011 alone, and the top 1 percent claimed 69 percent of the income generated.

In America, the richer you are, the more taxes you can avoid. That is why, according to the IRS, the top .001 percent of earners pay a lower tax rate than the top 3 percent and the top .01 percent pay a lower rate than the top 1 percent. To raise our voices in anger at Trump’s tax return is to miss this broader point: This is a problem with the system, not with any one greedy individual, and it is a perversion of the core principles of progressive taxation.

In fact, there’s some evidence that this lack of progressivity in the tax code is why incomes have stagnated for everyone else: When the rich get to keep a larger share of their winnings, they tend to want to win more, by any means necessary: merging profitable companies, outsourcing workers, and other anti-competitive conduct.

For his part, The Donald brushed off his tax avoidance as “good business,” and while voters could be forgiven for wondering what sort of good business involves losing $1 billion in one year, his point remains: To pay more taxes than legally required would have been a strange and arbitrary business decision. And even if he had done so, perhaps in hopes of avoiding some future political humiliation, these massive write-offs would still be common among billionaires not intending to run for president.

The only remedy is for Congress to rewrite the tax code in order to limit these tax breaks, restore progressivity, and ensure fairness across the income spectrum.

First, legislators must end their ideological war on the IRS and give it the funding needed to perform its essential tasks. This could be revenue-neutral if a significant portion of increased funding is dedicated to enforcement, which generates four dollars of revenue for every additional dollar in funding.

Next, Congress must end our most regressive tax policies, like the carried interest loophole, which allows hedge fund and private equity managers to avoid income taxes, and the stepped-up basis at death, which allows wealthy families to avoid capital gains taxes altogether. Ultimately, however, we must go even further by raising the rate on capital gains, finding a way to ensure that American firms pay their fair share, and curbing costly tax shelters for social policy goals like retirement security, homeownership, healthcare, and higher education.

Billionaire tax avoidance is not some cruel fact of life. It is not “early bird gets the worm.” It is not “you’re gonna serve somebody.” Tax avoidance springs from a system that the government, drunk on the potent potion of trickle-down economics, created, and that the government, sober with the hangover of an economy built only for the rich, can remake.