Rachel Maddow's Trump Misfire Is Much Worse Than You Think

Rachel Maddow's Trump Misfire Is Much Worse Than You Think
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Rachel Maddow’s over-hyped, incompetent, and totally incoherent reporting of Donald Trump’s 2005 federal tax return shows yet again how easily tax matters can be readily distorted for political gain, especially by the left.

This time, however, the gambit blew up in her face. Maddow is taking a lot of heat for her disastrous (for her and her agenda) and very public disclosure that Donald Trump indeed paid tens of millions of dollars in federal taxes in 2005 (and at a far higher rate than anyone on the left expected). However, in reality Trump’s federal tax situation is even more incongruent with left-wing perceptions than she realizes, or has been reported.

If the released tax return is genuine, the numbers are very clear. Donald Trump paid $38.4 million of federal income taxes in 2005 on taxable income of $31.6 million. Folks, that’s an effective federal tax rate of 122%. This rate is abnormally high because the Alternative Minimum Tax significantly minimized the net federal tax consequence of the $103.2 million (and totally legal) reduction in income Trump applied to his 2005 return (likely related to the $916 million tax loss he generated in 1995, as widely reported).

The 122% tax rate paid by Trump in 2005 shows how ineffective and uninformative it is to measure an individual’s (or entity’s) tax rate by looking at only one year. Clearly, the 122% tax rate is unsustainable and the underlying issue driving it has a finite life. Short of another similar tax event, Trump’s tax rate will normalize over time.

How is it, then, that Maddow and David Cay Johnston spoke of Trump’s 2005 tax rate being 25%?

The difference between the actual 122% tax rate and the 25% tax rate is due to the fact that Maddow and Johnston conveniently wished away, in doing their math, the $103.2 million reduction to income noted above, a reduction which probably had very little impact on the amount of tax Trump paid in 2005. In doing so, they artificially increased his income and hence decreased his tax rate percentage. Fun, huh?

Even if one accepts this optically-convenient analytical sleight-of-hand (and there is an argument to do so, although not articulated by Maddow and Johnston), Maddow and Johnston still got it wrong. They based their tax rate math on Trump’s total income of $151.8 million by adding back the $103.2 million revenue reduction noted above. The problem here is that federal taxes are assessed on taxable income, not total income. Trump’s taxable income in 2005 (again, adding back the $103.2 million revenue deduction) was $134.8 million, the difference (versus $151.8 million) being the itemized deductions totaling $17.0 million he took in 2005.

To compile a “federal tax rate” metric based on total income as opposed to taxable income is completely disingenuous. An individual’s decision to make charitable contributions is evidence of the individual's generosity. However, the resultant “tax rate” reduction (using total income as the denominator of the calculation as Maddow and Johnston did) caused by such generosity cannot become any sort of barometer of the fairness of the tax laws. Even Warren Buffett, in his famous New York Times Op-Ed piece in August, 2011 (where he claimed that his federal tax rate was less than half that paid by his fellow office workers) based his (otherwise horribly flawed) federal tax rate calculations on taxable income.

Based on taxable income (and ignoring the $103.2 million reduction in taxable income noted above), Trump paid taxes at a 29% clip in 2005, not 25%. As noted earlier, if the legal income reduction of $103.2 million is reinstated, his 2005 federal tax rate was 122%.

Federal taxes are complex, and issues arising on this topic should be fully vetted and analyzed before being reported. Don’t hold your breath. Clearly, Maddow’s and MSNBC’s “ready-fire-aim” approach to reporting on Donald Trump’s 2005 federal taxes did not serve them well. Perhaps it is time for them to put down their pencils on this topic and move on to other things.

George Harbison has been the Chief Financial Officer of several companies over the last twenty years.  

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