The Most Important - and Largely Uncovered - Lesson from the New York Times' Article About How Trump Got His Wealth

This New York Times story about tax schemes used by the Trumps is a story of 3 things, only 2 covered by the media.
link:
https://www.nytimes.com/interactive/2018/10/02/us/politics/donald-trump-tax-schemes-fred-trump.html?smid=tw-nytimes&smtyp=cur

1. It clarifies how dependent Trump is on his father for his wealth. His father gave him over $400 million in various ways (Trump was a millionaire before he was out of grade school.) Trump is definitely not self-made and his net worth is not much different than what it would have been had he simply invested his life time of gifts into a stock index fund.

2. It itemizes the various ways the Trumps cheated to avoid taxes. A massive amount of tax. In one instance, they turned about $900 million worth of real estate into an estimated value of $40 million in order to avoid millions and millions and millions in tax.

All that the media covered. What they don't cover is item 3.

3. This is really a story about origins. Trump became who he is because he hasn't known normal consequences. The most succinct way to illustrate how his father covered his bet is this: Trump owed a bond payment on his failing casino in 1990. He did not have the money. Fred Trump - his dad - sent a trusted employee down to the casino to buy $3.5 million worth of chips simply to infuse Trump's business with enough cash to enable him to make the bond payment. (And even that was not enough; he also wrote a check that day to Donald for another $150,000.) Donald could take risks knowing that his father would cover that risk, do what he could to protect his favorite son. A pundit once quipped of George W. Bush that he was born on third base thinking that he hit a triple; Trump, by contrast, stands triumphant at the plate simply because his dad owns the stadium.

We teach our kids consequences. They learn that if they are rude to someone, they could lose them as a friend. They learn that if they spend all their money for the week by Wednesday they are penniless until Friday. We do things and sometimes good things follow and sometimes bad. We use that feedback to adjust who we are, to learn how to survive or even prosper within our world.

Trump never had to do that. His father protected him from normal feedback and thus normal learning. Trump never had to adapt to the world; he had money enough that it adapted to him. Here, from the story, is how Donald was raised:

By age 3, Mr. Trump was earning $200,000 a year in today’s dollars from his father’s empire. He was a millionaire by age 8. By the time he was 17, his father had given him part ownership of a 52-unit apartment building. Soon after Mr. Trump graduated from college, he was receiving the equivalent of $1 million a year from his father. The money increased with the years, to more than $5 million annually in his 40s and 50s.

For our purposes, the biggest problem with this is that it insulated Trump from normal consequences. He could be rude. He could be crude. He could spend money lavishly or invest it recklessly. And in the morning he would still have more income than 99% of the adults around him.

Fred Trump is now dead and gone. He's not around to cover his son's bad bets. Who now does? I think it is us, the American people. Donald has yet to suffer any negative consequences for anything he has said or done. We already do and we're not even done with the payments.

The Economic Effects of the Republican Tax Plan - Punishing Work and Rewarding Luck

Although the Republican tax plan has been - and still is - evolving it has recently included changes that would tax innovation in two forms. One, grad students who receive a scholarship will be required to pay income tax on it's value. If you get a $45,000 a year scholarship to Stanford, you would have to report that as income. Two, any stock options granted to employees would be taxed at the point they are granted, not - as they are now - taxed at the point when they are exercised. As it is, this tax will make it harder for people to get PhDs and to launch startups. What do these two things have in common? They threaten the status quo and can unleash gales of creative destruction.

The bad news about new ideas, technologies and businesses that come out of grad school and startups is that they can overturn existing industries. Your hotels could be undermined by Airbnb. Your oil well can be undermined by affordable solar panels. 

There are two groups who are threatened by the gales of creative destruction. One group is the elites who own existing hotel chains, oil wells and other assets whose value can be eroded by the new. The other group are the folks who work for these elites and share their concern that innovation could disrupt their livelihood, people who may lose their coal mining jobs.

So startups and grad students are being taxed more but the Republican plan is advertised as a tax cut. So, who pays less? The folks who will get the most dramatic tax cut are the folks who inherit. Current law is already ridiculously generous to folks who inherit: if the value of the estate you inherit is $5.45 million, you don't have to pay a dime in inheritance tax. This new plan will double that. 

Republicans are rewarding people who resist change by simply inheriting and punishing people who are encouraging change. This is not particularly surprising for social conservatives, people who see as a threat most change from the world they learned.

I recently put out a survey to ask this question: 

Put aside for a moment whether you think that the highest marginal tax rate should be 5% or 95%. This question is about something else. Which of the following do you think should be taxed at the highest marginal rate?
- Income tax: I think money you make from your job, your labor, should be taxed at the highest rate
- Capital gains tax: I think that money you make from your investments should be taxed at the highest  rate
- Inheritance tax: I think the money you get from inheritance should be taxed at the highest rate
- Consumption tax: I think the money you spend (on groceries, transportation, housing, clothes, entertainment and other consumption goods) should be taxed at the highest rate

The responses were as follows:

My respondents clearly thought that the highest marginal tax rate should be applied to the income that came with the least personal effort: inheritance tax. This is the opposite of what Republican leaders believe, proposing a plan that levies the highest tax on the people who apply the most effort: the people who are out earning an income rather than leaving that job to their investments or grandparents.

Taxing inheritance the highest isn't just about fairness. If we want a society where everyone has an incentive to work, we would want a society where work is taxed less than inheritance and one person isn't free of tax on the first $10 million they inherit while another person has to pay income tax as soon as she makes more than $10,000. That is partly about fairness but it is also just common sense: we want everyone to help with the work.

The older I get the more confident I am about what makes for good policy and the less confident I am about what makes for good politics. On the face of it, a Republican tax plan that hikes up the deficit by an additional $2 trillion, gives tax breaks to rich grandkids, and discourages entrepreneurship and education would seem like taping a sign to your back that says, "Vote for the other guy." Who knows, though. It might just be that the American people will fall in love with a plan that helps to discourage the progress that so many find disruptive.

The Absurdity of the Estate Tax

John Oliver rather brilliantly explains American wealth and how it is compounded by the estate tax here. He misses one little point though, when refuting a Fox commentator who says that while she doesn't have $5 million she would really like to someday and why should she then have to pay tax on it?

First, let's assume that she is married and she and her husband don't just accumulate $5 million each but accumulate $6 million. Each. A total of $12 million. And further, let's assume she makes it before year end and then dies this year. (The exemption is going up every year. By the time she's 80 it's hard to know what it would be.)

So her heirs are going to get $12 million. She's worried about the tax they'll pay.

Well, first of all, the first $5.34 million of her inheritance will be exempt from taxes. And the first $5.34 million of her husband's wealth as well. So, there is $10.68 million with marginal tax rate of 0. Nothing.

Now, after that, the tax rate is 40%. (And actually, 40% is the top rate. It might be lower for the first few million but I couldn't find that information. So this is worst case.) So, the remaining $1.34 million of the $12 million will be taxed $528,000.

For the whole $12 million, that  works out to an average tax rate of 4.9%.

To put that in perspective, a person who actually worked to earn only a tenth of that  - say $1.2 million - would pay about 34%. If they made 1/10th as much money, they'd pay 10X the tax rate. And of course if this TV commentator leaves behind ONLY $5.34 million, the heir's average tax rate is 0, considerably lower than the rate paid by working stiffs.