All Sides Should Cheer Trump's Tax Avoidance

It's perhaps an apocryphal piece of history, but during the tax reform fights of the mid 1980s House Ways & Means chairman Dan Rostenkowski quite literally threatened to zero out all taxes on real estate profits. Tired of the countless favors written into the federal tax code on real estate, he would seek to pass a bill that would theoretically bring the ultimate tax simplification of all to property: none at all.

Readers are probably wondering how this could have been threatening to real estate moguls, but apparently it was. Thanks to myriad deductions, loss write-offs and depreciation allowances, the tax code could be used by the well-lawyered and accounted to sometimes avoid taxes altogether. This has relevance given all the hysteria related to Donald Trump having used real estate losses as a way of apparently avoiding federal taxes for up to 18 years.

What all of this hopefully reminds us is that politicians don't hike taxes as much as they raise the headline rate so that they can bring the effective tax rate down through myriad tax handouts. As Larry Kudlow and Brian Domitrovic report in their new book JFK and the Reagan Revolution, while the highest earners in the early 1960s faced a top tax rate of 91 percent, their effective rate after various deductions was a more manageable (but still way too high) 36 percent. This is why readers can kiss off the passage of a flat or consumption tax anytime soon. Politicians will never do it. Their power springs from their ability to hand out favors through an overly complicated tax code.

Trump's already said what's true; that he was merely doing what was legal when he avoided taxes. And while it will soon be explained why we should cheer him for avoidance, let's first stop blaming him. Trump's avoidance of taxes is a monument to the feckless leadership of Democrats and Republicans over the last 100+ years ever since the federal income tax was introduced. They created the monstrosity that made Trump's light taxation possible. Don't shoot the messenger as it were, or in this case the public face revealing how the political class has wholly corrupted U.S. taxation.

As for Trump's alleged non-payment of taxes, amen. Never explained by politicians, pundits and economists is why we're made better off when the rich write big checks to the federal government. Not only is it offensive that the tax code penalizes wealth, but the main thing is that we're all made worse off when the U.S. Treasury collects more in the way of revenues. To see why, we have to remind ourselves what happens when the rich are able to avoid paying taxes.

Applied to Trump himself, let's assume he earns $100 million each year. That number is high or low depending on whom you speak to, but that's really not the point. What happens when Trump gets to keep $100 million earned?

First off, odds are he can't spend it all. That's brilliant. It is because if he puts it in the bank, banks aren't paying him interest so that they can lovingly stare at Trump's dollars. Instead, they pay Trump interest so that they can immediately lend the dollars deposited to those with a tiny fraction of Trump's wealth who need a loan to take a vacation, buy a car, borrow money to go to college, or borrow money to start a business.

When the rich save, or "hoard" as it were, we all benefit. Money doesn't lay idle, so when it's saved those of us not nearly as rich as Trump get immediate access to it.

What if Trump is more aggressive and puts that money in the stock market? In that case he's buying shares in companies that need capital in order to expand, hire, conduct research & development, etc. When Trump gets to hold onto his money and is able to invest it, we're all advantaged. Lest we forget, there are no companies and no jobs without investment first.

But what if Trump proves even more intrepid with earnings shielded from the tax man? What if he places the wealth not taxed in private equity and venture capital funds? If so, companies on the proverbial deathbed will have a chance to survive (along with the jobs inside those companies) thanks to the extra wealth chasing beaten down businesses. And then if Trump prefers venture capital, his untaxed earnings will be directed to future Microsofts, Intels and Dells eager to create products and services that will truly transform our lives for the better.

To put it plainly, there's not a more economy and life-enhancing way to improve everyone's lot in life than to reduce the tax burden on those who earn the most and have the most. Unless they're quite literally stuffing their wealth under a mattress, when they get to hold onto what is theirs we all benefit.

Conversely, when the government gets the money of the rich we're all worse off. Up front, successful taxation of the superrich means there's less investment. This means fewer companies, fewer jobs, and lower wages.

But consider what else happens. When governments are showered with revenues they spend them. The left should properly hate this given the propensity of politicians to try and save the world with the money and blood of others. Since World War II federal revenues have surged, and with the increase, horrid amounts of U.S. treasure and blood have been wasted on naïve attempts to protect, fix, and "democratize" the rest of the world.

Lower revenues should also cheer the right. Medicare began in 1965 as a $3 billion program, but thanks to massive federal revenue inflows over the last 50 years Medicare has ballooned to what will soon be a $1 trillion annual federal program. Despite this, it still hasn't worked from the standpoint of universal healthcare for the elderly.

Abundant federal tax revenues have proven a huge negative for the American people. This is true regardless of one's ideology. Thanks to massive federal tax collections wars have been too easy to enter into, faulty programs have been too easily funded; all of this succeeding only insofar as it's elevated the status of politicians and their enablers in Washington.

So while Trump's alleged non-taxation is the logical result of the tax-code arrogance that's come to define the political class, one positive tradeoff has been that perhaps Treasury hasn't collected as much in taxes as it might have. Whatever the answer, we're not made better off when individuals hand over more of their wealth to the federal government. Trump's supposed tax avoidance is something all sides should cheer.