William Watson: Trump’s dad’s tax tricks teach an important lesson to the left

That people respond to taxes in just the way economists predict is a moment of great enlightenment

A photograph of Fred Trump, the father of U.S. President Donald Trump, is seen in the Oval Office of the White House in Washington, D.C.Saul Leob/AFP/Getty Images

Last week, The New York Times published a 15,000-word report, based on a year’s investigation and 100,000 pages of documents, into how Donald Trump, a self-declared self-made man, is actually a Dad-made man, courtesy the many devices Fred Trump used to reduce the taxman’s take from the fortune he built. For those of us who are not Trump fans, none of the questionable behaviour described was the least bit surprising. What was interesting, however, was the reaction of some Trump critics on the left (where of course there are only Trump critics).

A first interesting reaction concerned the supposed hypocrisy of Trump’s father getting his start by building housing in Queens and Brooklyn financed by federally subsidized loans. The report does not describe Fred Trump’s politics at any length but suppose that (unlike his son for most of his life) Fred was a conservative Republican. Conservative Republicans should generally not approve of federal government subsidies for anything beyond defence and, maybe, critical infrastructure. But if you advise Washington not to waste its money on anything else, and Washington ignores your advice, is it then hypocritical of you to profit by supplying whatever it is Congress has decided to subsidize?

Hardly. As former Texas senator Phil Gramm once put it: “If (the Senate) should vote next week on whether to begin producing cheese in a factory on the moon, I almost certainly would oppose it … On the other hand, if the government decided to institute the policy, it would be my objective to see that a Texas contractor builds this celestial cheese plant, that the milk comes from Texas cows, and that the Earth distribution centre is located in Texas.”

When hiding a dollar saves me 55 cents, I'm more likely to try to hide it

Turning that around, should Fred Trump’s willingness to build housing for the federal government be read as evidence that publicly subsidized housing is actually good public policy? Not at all. Fred Trump was a builder. He presumably would have built houses for anyone willing to pay for them. That the free-enterprise system produces business people who do supply whatever goods and services they profit by supplying is one of its main virtues. Granted, at some stage people need to make ethical decisions about what they will or won’t do to make money. In the 1940s and 1950s some saw federal aid to housing as akin to devilry. But most people probably didn’t.

Now if Fred Trump decried any and all federal spending except support for housing, we might suspect his motives. But profiting from federal contracts isn’t endorsement of anything. Should such projects be reserved for the liberal Democratic (or in this country, NDP) activists who push them most strongly? Talk about perverse incentives!

A second, more heartening left-wing reaction to the Trump family’s financial history concerns the complexities that Fred Trump pursued in order to move money to his children in as tax-free a way as possible. As the Times notes, in the early 1990s, the estate tax faced by a wealthy New Yorker such as Mr. Trump Sr. was 55 per cent. One scheme he used to move his money down a generation was All County Building Supply & Maintenance, a company owned by his children that sold him the materials and services his real estate business required at a markup of “20 per cent, or 50 per cent or more.” The Times goes on to say it found fully 295 different streams by which Fred Trump moved money to his son.

On Slate’s Political Gabfest, the podcast I use for monitoring Democratic Party politics, a surprising reaction to all this tax creativity was that maybe it would be best to just ditch the estate tax, since trying to avoid it drives rich people to such extremes. The rationale was cast in humanities/psychological style terms: rich people’s visceral hatred of the very idea of estate taxation makes them crazy. But an economist would argue the real problem is not revulsion per se but the 55-per-cent rate. If the state could content itself with five or 10 per cent, it might find the executors of big estates (after the fact) or the creators of them (before the fact) might be more willing to pay their transfer taxes.

As a simple matter of economics, when hiding a dollar saves me 55 cents, I’m more likely to go ahead and try to hide it than if it only saves me five or 10 cents. That will be especially true if I have to pay my tax lawyers, say, 30 cents on the dollar to find the hiding places.

That people respond to taxes in just the way economists predict is a moment of great enlightenment. If the Trump family’s finagling does end up teaching the left that lesson, it may even have been worth the cost to the U.S. Treasury.

