Trump Tax (Non) Disclosure

By David J. Herzig

Today, Paul Caron in his TaxProf Blog, highlighted an article by John McGinnis (a Constitutional Law Scholar at Northwestern).   In the article, McGinnis states that Trump should not have to disclose his income tax returns.  His premise is that the norm of tax return disclosure is “bad.”  He believes that privacy norms should trump any right of the electorate to see a candidates taxes.  I vehemently disagree with this normative position. I hesitate to write a “hot take” or half-baked reaction to the article.  But there is dangerous precedent failing to highlight the error(s) in McGinnis’ position. (I am under the assumption that McGinnis had limited space to write his opinion and nuance he would normally make is lost to space constraints).

I, as well as others such as, Joe Thorndike, have previously made the point that tax return disclosure is very important.  In my Forbes article, I made the point of a variety of reason tax return disclosure is very important.  I said, “First, tax returns can be a window to understanding how someone truly thinks and behaves; what you do when you think the public isn’t looking, shows the more authentic self.  (Hillary Clinton’s tax return is arguably less revealing, since she has long known her returns would be made public.)  Trump’s tax filings might provide some additional insight into how he would run the country.  Does he follow rules? Stake out very aggressive positions?  Take unnecessary risks?”  I think how people act in private is the best proxy for understanding what they think.  With a candidate like Trump, this may be the only window into how a Trump presidency would look like.

McGinnis starts his discussion by making the first point in support of his thesis that privacy should trump public disclosure.  He says “some tax returns can reveal information about businesses that will help competitors or harm family relations. As result, some people from whose candidacy the nation may benefit will not run for president or any other office where this norm takes hold.”

It may be true on the margins that a tax return disclosure might allow a business competitor to gain some understanding of the candidate.  This competitive disadvantage could then stop potentially qualified people from running for office.  However, the tax return disclosure does not seem to be right proxy for McGinnis’ theoretical frame.  Rather, it is the Federal Election Commission (“FEC”) required disclosures.

McGinnis point about insider information is true.  In business, knowing proprietary information is quite useful.  For example, in the Sony email scandal, sensitive emails were made public.  Emails that were written and assumed to be private became public.  In a recent podcast Chris Sacca told Bill Simmons he used the emails to figure out Marc Cuban’s per episode salary on Shark Tank to negotiate his deal. Sacca’s use of what was thought to be private information benefited him.

Could the same be true of a competitor of Trump? Sure.  For example, by reviewing his tax returns, a competitor might get a better idea of his cash flow or true net worth.  By understanding his cash flow or true net worth, a competitor might be able to beat Trump in certain deals. This type of economic game theory happens all the time in closed markets (similar to a high level real estate bid situation) like the NBA or NFL.  Often in free agent signings, teams that know the cash flow (e.g., salary cap) of the other team will use that information to get a targeted player.  Daryl Morey famously did a back-loaded contract for Jermey Lin that prevented the New York Knicks from being able to match the contract.

But the real question is will there be chilling effect on qualified candidate who run businesses because your tax returns are public?  My first reaction to this point, is that if you are actively running a business where you are worried about competitive advantage, then you should not at the same time be president. President of the United States is not a part time job.  So, any problems you would have with competitors go out the window if you are elected president. If you are not serious about this being your ultimate goal, do not run!

Moreover, it is not the tax returns that will provide a significant competitive advantage. First, the disclosure the Donald Trump is required to do with the FEC is far more detailed than anything on a tax return (especially the first two pages that so many candidates disclose).  For example, on the FEC disclosure, I know the structure of all his businesses. The ownership structure is not public information.  Since most of his business are Delaware companies, there is very little, to no, detail about ownership.  However, in his disclosure, we know who owns the entities.  There is a much greater loss of privacy related to FEC disclosure than tax return disclosure.  The marginal impact of making public disclosures of tax returns to run for president of the country seem to trump any norm of privacy in this regard.

Second, as to the potential hurt feelings of family members, my primary position is in today’s world of politics, hurt feelings are what you sign up for.  I am sure the Ted Cruz was never happy when memes would pop up on social media implying that his children hated him, or that Cruz intentionally hit his wife with his elbow.  I am not sure how when you run for public office in 2016 that the normatively correct position should be only the candidate is open for examination, and there is a limit on that examination to what the press can dig up.

But beyond that point, once again, the tax returns will provide less detail about family finances then the FEC disclosure.  For example, it would be hard to parse out what was owned by Donald and what was owned by Melania.  However, on page 34 of the FEC disclosure, we clearly know how little Donald has put in Melania’s name.  If there is a privacy concern, then the FEC disclosure should be the starting point for that discussion not the tax returns.

In conclusion, as to McGinnis’ first point, I fail to see how either a potential business advantage bestowed on competitors or an opening of family finances, should trump a knowledge of the public to see how a candidate acts when they are out of the public eye. Maybe I am wrong and someone can help me understand the err in my ways.

I would like to point to a specific example where tax return disclosure this cycle has been illustrative of personality traits not the honesty that McGinnis references.   Through the tax return disclosures, the public was able to learn about Marco Rubio’s constant struggles with personal debt.  By making this information public, the electorate can decide if that means: (a) Marco Rubio is just like me struggling under debt so he will by sympathetic to my plight; or (b) if Marco Rubio can’t balance his personal finances how can he be the “CEO” of the United States.  The disclosure does not lead to the conclusion.  It just provides facts to help a voter make an informed decision.

McGinnis’ second point is that “the release will hurt people with complex financial affairs, who take advantage of various tax preferences.”  His position is that the public is too unaware of the intricacies of the tax code to understand the distinctions.  He believes that  the public will attribute a presumed low tax rate to Trump rather than the tax code.  This will, according to McGinnis, act as a distraction rather than a focused “fight on policy issues.”

There is little evidence that McGinnis comes close to hitting a privacy norm target, and, from my perspective, totally misses the point.  First, the precedent for disclosure of tax returns in order to run for president is some 40 years old by now.  That seems like a rather established norm.  Second, Trump has openly stated he pays a little tax as possible. Additionally, he has stated he has enormous net worth.  If he believed his tax rate and net worth were private, then why are they key points to his campaign?  You can’t have it both ways where you use your net worth and business acumen as a selling point, but, then hide under privacy concerns for verification.  My client’s use to say, trust but verify.  Why is that not the norm when running for president?

I am not sure how the right to keep your return private correlates with the a shift of policy discussions.  It illuminates the public on the preferences built into the tax code.  After all, isn’t the public outcry about Trump’s presumed tax rate a policy issue?  The fact that the public is outraged about the planning opportunities or tax benefits for wealthy investor is an important policy discussion.  My fellow blogger, Sam Brunson, in the last election cycle wrote a nice piece (135 Tax Notes 1137 (2012)) about Romney’s tax returns and how to tax him.  The disclosure of Romney’s return and the potential hot button off-shore IRA did not stop him from running from President.  It did start a discussion about whether the planning that Romney did was proper and should be supported by the tax code.  This is the type of tax policy discussion that a disclosure of Trump’s tax returns should initiate.

I believe that McGinnis is basically saying if you don’t want career politicians to be the only pool of applicants for president, then in order to increase the pool we need to increase privacy as related to the candidates.  I don’t believe the trade-off (increased pool) is worth the cost (less transparency).  I do believe a precedent of not disclosing this information is extremely problematic.

I have little confidence that Trump will release his tax returns.  There seems to be no upside to him.  His supporters seem not to care; and, his detractors will not come around because of the disclosure.  But to cloak this strategic political position in privacy rights seems very misplaced and dangerous.

One thought on “Trump Tax (Non) Disclosure

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