There has been a lot of discussion whether there was any quid pro quo  associated with donations to the Clinton Family Foundation while Hillary Clinton was Secretary of State. The Merriam-Webster Dictionary defines the term as “something that is given to you or done for you in return for something you have given to or done for someone else.”

To date, there is no evidence the State Department granted any value that would not have otherwise been available to the donor.  In some cases, a donor’s request was denied based on the substance of the inquiry and departmental policy.  At best, a donor’s contribution may have increased the probability the department would consider the request.  If one stretches the definition of quid pro quo to include this kind of access or consideration, every politician and businessperson in America is technically guilt of similar transgressions.  Every loyalty program offered by airlines and hotels is a quid pro quo.  

The American justice system would be inundated with nuisance law suits if the exchange of value was broadly defined as questionable political or commercial behavior.  Perhaps this is why the Supreme Court unanimously overturned former Virginia Governor Bob McDonnell’s corruption conviction earlier this year.  Chief Justice John Roberts wrote the decision which included the following:

Officials might wonder whether they could respond to even the most commonplace requests for assistance, and citizens with legitimate concerns might shrink from participating in democratic discourse.

So how do we distinguish between preferential treatment in the course of doing business versus potentially criminal behavior associated with the exchange of goods and services?  One red flag might be whether there is another violation of laws or regulations by the individual who initiates the exchange.  This is where Donald Trump enters the discussion.

Consider the following.

• Since 2008, more than 20 individuals previously enrolled in Trump University in Florida filed suit alleging fraud totaling over $500,000 in payments to the unaccredited entity.
• In 2010, Pam Bondi was elected State Attorney General in Florida.
• In 2013, Bondi announced she was considering joining the New York attorney general’s class action suit against Trump University.
• Three days later, Trump’s charitable foundation made a $25,000 donation to Bondi’s re-election campaign.  NOTE:  The IRS charged the foundation with several violations including illegal political activity and failure to report the donation.  The Trump foundation was fined $2,500 for violations of Section 501(c)(3) of the IRS code which governs charitable foundations.
• Following the donation, Attorney General Bondi declined to pursue charges against the Trump Institute, a Florida affiliate of Trump University.
• A follow-up report in the Washington Post revealed the foundation listed the $25,000 as a donation to a non-existent non-profit in Kansas.
• The Trump foundation attributed the donation to a clerical error and paid the fine.  Bondi’s campaign treasurer claimed he had unsuccessfully tried to return the donation.

You might be asking, “Shouldn’t you have titled this post ‘A REAL Case of Quid Pro Quo’?” No, and here is why!  Based on a 2016 survey of 391 lawyers, class action defense attorney Carlton Fields reported a routine class action suit costs the defendant an average of $8.5 million in legal fees.  As the complexity of the class action increases, legal costs can exceed $1.0 billion.  Including the IRS fine, avoiding a Florida class action suit cost the Trump Foundation a total of $27,500.  Taking the lowest cost of a class action defense in the Fields survey ($300,000), this represents a 1091 percent return on investment in three days.

There is one other consideration.  Although Trump started the foundation with royalties from The Art of the Deal, it has been reported he has not made additional contributions from personal resources for several years.  Therefore, the illegal contribution and fine were paid with other people’s money.  In other words, Trump’s personal return of investment is actually infinite (potential legal defense fees divided by ZERO).

I wonder if this episode will appear in the next edition of The Art of the Deal.

UPDATE:  After being exposed, Trump paid the fine out of personal funds and reimbursed his foundation for the $25,000 illegal contribution.  One more example of Trump settling without admitting he did anything wrong and blaming staff for a clerical error.

For what it’s worth.
Dr. ESP

This was supposed to be the week both major party candidates concentrated on their visions and proposals for growing the American economy.    On Monday, Donald Trump focused on reduced tax rates, deregulation and repeal/renegotiation of trade agreements. We have yet to hear from Hillary Clinton (scheduled for Thursday) but we know she will likely include proposals to hold or lessen the tax burden on low and middle income families while raising rates or eliminating loopholes which primarily benefit the wealthy.  Although other events have dominated the election news, economic growth and equity still deserve our attention.

My question is, “Are tax rates the best or only way to address inequities in the tax code?”  This question was inspired by Donald Trump’s proposal to convert the current child care credit to a deduction and increasing the dollar limit on eligible day care costs above the current $3,000 for one child and $6,000 for two or more children.  Who would benefit most from these changes?

• Today, a family of four living on the cusp of the poverty line ($23,550) which spends the maximum ($6,000) on child care gets a tax credit of 30 percent or  $1,800.  However, it is highly unlikely a family at the poverty level could spend over 25 percent of their total earned income on child care.
• In contrast a family with the median family income of $53,637  who spends the maximum $6,000 on child care  (11.2 percent of their annual income) would get a 20 percent credit worth $1,200.
• However, if a family on the poverty threshold spends the same percentage of income (11.2 percent) on day care, their credit is only worth $790 (30 percent of $2,635 in day care expenses).

So even though the tax credit is progressive based on earned income, the absolute benefit is higher for a wealthier family.

We do not have the details of the Trump proposal,  but he talked about a tax deduction versus a credit and raising the maximum dollar amount.  Just for argument sake, let’s say he raises the dollar limit to $10,000.  Here’s what happens to those two families.

• The family on the poverty line will have a taxable income of $0 (income of $23,550 less $12,600 standard deduction and four exemptions at $4,000/person).  Therefore, they will receive no day-care subsidy.
• The family at the median family income will have a taxable income of $25,037 ($53,637 minus $28,600 with exemptions and the standard deduction).  They are in the 15 percent tax bracket.  If they spend the maximum $10,000 for day care, they will receive a $1,500 subsidy.
• And a family in the proposed highest rate of 25 percent will receive a $2,500 day care subsidy.

This is just the tip of the iceberg.  Think about the major tax deductions such as mortgage interest, state/local taxes and charitable giving.  In 2013 (last year for which there are IRS statistics), total mortgage interest claimed was $317 billion.  Total charitable giving claimed was $194 billion.  And state/local tax deductions claimed equaled $506 billion.  The overwhelming majority of these claims are made by upper income taxpayers who are currently subsidized at rates of 25 to 35 percent for these personal expenditures.

Want to make the individual income tax more equitable?  Here is my proposal.

1. Raise the exemption to $5,000/person.  Therefore, a hypothetical family of four would have its first $20,000 exempt from federal income taxes.
2. Abolish the standard deduction.
3. Convert all current tax deductions to flat rate credits.  For example, instead of subsidizing home ownership based on income (zero to 35 percent), paid mortgage interest would entitle all taxpayers to a flat rate refundable credit.  I am not sure how much the exact percentage would be, but it would easy to calculate.  What is the total tax expenditure for the mortgage interest deduction?  The Tax Policy Center estimates the total mortgage interest subsidy in 2016 will be $75.3 billion dollars.  My preliminary estimate suggests a refundable tax credit somewhere in the range of 15-18 percent would be revenue neutral.
4. Develop revenue neutral deduction to credit conversions for all major Schedule A line items.
5. All future tax incentives would be in the form of flat rate refundable credits available to all taxpayers regardless of filing status or income.

This proposal is presented only as a first step to make the individual income tax code more equitable.  During my research for this post, I found there are other organizations such as the Center for Budget and Policy Priorities which have previously raised similar issues.  After watching the current presidential campaign, my next question is, “Is the American body politic capable of organizing a movement behind solutions instead of anger and dissatisfaction?”

For what its worth.
Dr. ESP