When the price of Apple stock hit a then-record high in October 2018, among the shareholders counting their gains were 43 Republicans in Congress, who collectively owned as much as $1.5 million worth of the tech giant’s shares. Apple’s stock jumped 37 percent in its run-up to that record. Several variables were behind the climb, including higher-than-expected earnings.
But congressional Republicans themselves had a hand in the spike, stock analysts say. Legislation they championed — the 2017 Tax Cuts and Jobs Act — doled out nearly $150 billion in corporate tax savings in 2018 alone. One effect: a big boost in stock prices.
Cutting tax rates for companies like Apple and hundreds of other stocks they own was one of many ways Republican lawmakers enriched themselves after they passed the tax law, according to a Center for Public Integrity analysis of the 186-page law and members’ financial disclosure forms. Democrats also stood to gain from the tax bill, though not one voted for it; all but 12 Republicans voted for the tax bill.
As part of the bill, Republicans approved tax breaks in 2017 for seven classes of assets many of the wealthier members of Congress held at the time, including partnerships, small corporations, real estate, and several esoteric investment vehicles. While they sold the bill as a package of business and middle-class tax cuts that would not help the wealthy, the cuts likely saved members of Congress hundreds of thousands of dollars in taxes collectively, while the corporate tax cut hiked the value of their holdings.
“It feels to me like a kleptocracy,” said Jeff Hauser, director of the Revolving Door Project at the Center for Economic and Policy Research, a left-leaning think tank in Washington, D.C.
Such congressional self-enrichment has been thrust into the 2020 presidential campaign. Democratic candidate Sen. Elizabeth Warren has said her first priority as president would be to pass an anti-corruption package that, among other things, would forbid members of Congress from owning individual stocks, bonds, and other securities so they could not benefit from tax or financial laws they passed.
“Under current law, members of Congress can trade stocks and then use their powerful positions to increase the value of those stocks and pad their own pockets,” Warren wrote in a September Medium post.
Cut taxes, get paid?
Two years after the passage of the Trump tax act, its effects — some obvious, some hidden — are coming into focus. One is its cost: Contrary to Republican claims, the law is not paying for itself and is likely to burden the nation with an additional $1.9 trillion in debt over 11 years beginning in 2018, according to the Congressional Budget Office.
And while the law cut tax rates for people of all income brackets, some of its tax benefits overtly favored the wealthy, such as the 2.6 percentage point tax rate cut in the highest bracket and the doubling of the estate tax exemption to $11.2 million. Other provisions were subtler yet favored the wealthy even more: tax breaks for their investments, for instance, or changes that boosted the value of their stocks. Among the rich beneficiaries are members of Congress, more than half of whom were found to be millionaires in 2014.
The tax law’s centerpiece is its record cut in the corporate tax rate, from 35 percent to 21 percent. At the time of its passage, most of the bill’s Republican supporters said the cut would result in higher wages, factory expansions, and more jobs. Instead, it was mainly exploited by corporations, which bought back stock and raised dividends. In 2018, stock buybacks exceeded $1 trillion for the first time ever, according to TrimTabs, an investment research firm. Net corporate dividends reached a new high in 2018 of more than $1.3 trillion, nearly 6 percent more than the previous year. The result, analysts say: The buybacks boosted stock prices, and bigger dividends put even more money in the pockets of stockholders.
Promises that the tax act would boost investment have not panned out. Corporate investment is now at lower levels than before the act passed, according to the Commerce Department. Though employment and wages have increased, it is hard to separate the effect of the tax act from general economic improvements since the 2008 recession.
The boost in stock prices, however, was predictable. As the bill was reaching its final stages in 2017, Bryan Rich, the CEO of Logic Fund Management, a wealth advisory company, wrote that the proposed corporate rate cut “will go right to the bottom line of companies — popping EPS [earnings per share] and driving stocks even higher.”
Those benefits mainly went to the rich, as the wealthiest 10 percent of Americans own 84 percent of all stocks. The 10 richest Republicans in Congress in 2017 who voted for the tax bill held more than $731 million in assets, almost two-thirds of which were in stocks, bonds, mutual funds, and other instruments, according to Roll Call’s semiannual assessment of Congress’s wealth.
The precise amount of Republicans’ windfall can’t be determined without a review of the members’ tax returns, which they are not required to disclose.
All but one of the 47 Republicans who sat on the three key committees overseeing the drafting of the tax bill own stocks and stock mutual funds, according to Public Integrity’s analysis. Rep. Mike Kelly, R-Pa., was among them. A member of the Ways and Means Committee, which oversaw the writing of the tax bill in the House, Kelly reported in 2018 that his spouse owned 101 individual stocks, Apple included, with a minimum total value of $439,000.
When he voted for the 2017 tax cuts, which will be funded by nearly $2 trillion in added debt, Kelly called it “the most important vote I’ve ever cast.” Yet 19 months later, he voted against a two-year budget agreement that added to the national debt by hiking government spending for defense and nondefense programs by $320 billion. Kelly warned that “America is driving toward a fiscal cliff.”
Orrin Hatch, R-Utah, was chair of the Senate Finance Committee in 2017, when he and his wife owned mutual funds and a limited liability corporation valued between $562,000 and $1.43 million, paying them between $12,700 and $38,500 in dividends and capital gains, according to Hatch’s financial disclosure forms. They also owned a blind trust worth between $1 million and $5 million. (Congressional financial disclosure forms do not require members to report the precise value of assets and income but rather in 11 different ranges, each with a minimum and a maximum value.)
For decades, Hatch, who retired in 2018, had been one of the loudest deficit hawks in Congress. Just 10 months before he would shepherd the tax bill through his committee, Hatch said, “The national debt crisis poses a significant and growing threat to the economic and national security of this country.”
His concern over national security lasted two months. In April, Hatch signaled he was open to a Republican tax bill that would likely add to the national debt. When Republicans passed the tax bill in December 2017, he beamed. “This is a historic night,” he said at a press conference.
(Public Integrity sought comment from 13 current or former members of Congress mentioned in this article; only two responded.)
‘All of the above is acceptable’
Republican lawmakers also boosted the value of their stock holdings when they encouraged American corporations to repatriate money they were holding overseas. The tax law decreed that future foreign profits would not be taxed at high rates, and that previously earned profits stashed abroad — an estimated $2.7 trillion — would be taxed one time at no more than 15.5 percent.
In 2017, Apple was sitting on $250 billion in overseas profits. In January 2018, the month after President Donald Trump signed the tax bill into law, the tech behemoth and third-largest American company said it would pay the new, lower tax and start bringing the cash home. Just four months later, Apple said it would buy back $100 billion of its stock and hike its dividend by 16 percent. Apple shares increased almost 9 percent by the week’s end. In April 2019, Apple announced $75 billion more in buybacks, a move analysts said would likely drive its stock price higher. A day after the announcement, shares increased in value nearly 5 percent. The stock continued to hit record highs late last year.
That increase and higher dividends augmented the holdings of 43 Republicans who voted for the tax bill, including seven senators and their spouses who owned Apple stock in 2018: John Hoeven of North Dakota; David Perdue of Georgia; Arizona’s Jeff Flake, now retired; Jim Inhofe of Oklahoma; and the spouses of Pat Roberts of Kansas, Maine’s Susan Collins, and Shelley Capito of West Virginia.
A spokesperson for Hoeven said that he “follows Senate regulations and reporting requirements.” Sen. Collins’s husband’s portfolio decisions are all made by a financial adviser, a Collins spokesperson said, and he has not bought or sold Apple stock since 2015.
Perdue is one of the wealthiest senators, with a net worth of $15.8 million, $14 million of which is in stocks, according to Roll Call. In 2018, with his wife, Perdue owned $100,000 to $250,000 in Apple stock, he reported. The couple sold some of it and received annual dividends and capital gains that year between $15,000 and $50,000.
The optics that the tax cuts would boost the prices of stock he owned apparently didn’t concern Perdue. Weeks before Republicans passed the tax bill, Fox News host Maria Bartiromo asked Perdue if he was worried that the corporate cuts would result in buybacks and increased dividends instead of new jobs.
“Well, Maria,” he answered, “I come from the school that, you know, all of the above is acceptable. This is capitalism.” He later added that it was all about “capital flow,” whether for jobs, economic growth, or dividends.
An affinity for small business
Passing a law that helped fuel increases in stock prices wasn’t the only way Republicans enriched themselves. The new law also contained a 20 percent deduction for income from so-called “pass-through” businesses, a provision called the “crown jewel” of the act by the National Federation of Independent Businesses, a lobbying group.
Pass-throughs are single-owner businesses, partnerships, limited liability companies (known as LLCs) and special corporations called S-corps. Most real estate companies are organized as LLCs. Trump owns hundreds of them, and Public Integrity’s analysis found that 22 of the 47 members of the House and Senate tax-writing committees in 2017 were invested in them.
Pass-throughs can be found in any industry. They pay no corporate taxes and steer their profits as income to business owners or investors, who are taxed only once at their individual rates. Despite their favored treatment as a business vehicle, the 2017 tax act did them another favor: It allowed 20 percent to be deducted off the top of the pass-through income for tax purposes.
In the Senate, the champion for the pass-through break was Ron Johnson, a Wisconsin Republican who was a Budget Committee member when the tax bill was being written. He argued that because the bill was slated to give big corporations a 14 percent cut in their tax rate, smaller businesses should get a break, too. “I just have in my heart a real affinity for these owner-operated pass-throughs,” he told the New York Times when the Senate was considering the tax bill in November 2017.
No doubt. Johnson, with his wife, held interests that year in four real estate or manufacturing LLCs worth between $6.2 million and $30.5 million, from which they received income that year between $250,000 and $2.1 million, according to his financial disclosure form.
How much money lawmakers will pocket from the 20 percent pass-through deduction can’t be determined without an examination of their tax returns. There are limits on how much of the deduction can be taken based on total income and business category. But in some cases, the tax savings could run into the tens of thousands of dollars. Johnson declined to comment for this article.
And while the provision did help small businesses in certain favored categories, the benefits of the pass-through deduction are heavily tilted toward the wealthy. Sixty-one percent of the benefits of this provision will go to the top 1 percent of taxpayers in 2024, according to the Joint Committee on Taxation, the congressional agency that analyzes tax bills.
GOP real estate owners make out big
Besides the law’s benefits to real estate pass-throughs, real estate in general was hugely favored by the tax law, allowing property exchanges to avoid taxation, the deduction of new capital expenses in just one year versus longer depreciation schedules, and an exemption from limits on interest deductions.
“If you are a real estate developer, you never pay tax,” said Ed Kleinbard, a former head of Congress’s Joint Committee on Taxation.
Members of Congress own a lot of real estate. Public Integrity’s review of financial disclosures found that 29 of the 47 GOP members of the committees responsible for the tax bill hold interests in real estate, including small rental businesses, LLCs, and massive real estate investment trusts (REITs), which pay dividends to investors. The tax bill allows REIT investors to deduct 20 percent from their dividends for tax purposes.
Real estate pass-throughs got an especially sweet gift in the form of a provision inserted into the tax bill behind the closed doors of the House-Senate conference committee. The Senate bill under consideration based a company’s pass-through deductions on the total amount of wages paid to employees. Because real-estate pass-through companies typically have few employees, however, this meant they could offer only tiny deductions to investors.
A stroke of the pen fixed that: Someone changed the law to allow real estate companies to use the value of their assets — in addition to the size of their payrolls — to calculate pass-through benefits. Because such companies can hold sizable assets, suddenly they, too, could offer the full 20 percent deduction to investors.
“In my judgment, it was a big giveaway to the real estate community, and they are very good lobbyists,” said Steve Rosenthal, a senior fellow at the nonpartisan Urban-Brookings Tax Policy Center in Washington, DC. That giveaway contributed to last year’s record $1.02 trillion federal revenue shortfall.
One Republican senator who benefited from the last-minute provision was Tennessee’s Bob Corker, who at the time owned or was a partner in 18 real estate businesses, LLCs, and partnerships, records show. His reported income from them was between $2.1 million and $11.1 million in 2017. Corker, who retired in 2018, told Public Integrity he had nothing to do with the provision or the 20 percent pass-through deduction. It was all Ron Johnson’s idea, Corker said.
“The budget deficit is going up so that people like Ron Johnson and Bob Corker can pay less in taxes,” said Hauser, of the Revolving Door Project.
Closing the loopholes?
Republicans wouldn’t have had many of these apparent conflicts if Elizabeth Warren’s anti-corruption plan had been in effect.
Much of the plan was pulled from her Anti-Corruption and Public Integrity Act, which she introduced in the Senate in 2018. Among its provisions, the bill would forbid lawmakers to own or trade individual stocks, bonds, commodities, hedge funds, derivatives, or “complex investment vehicles.” Members would be required to put their assets in “widely held investment vehicles” such as mutual funds. Warren and her husband were invested in 20 mutual funds in 2017, but no individual stocks.
Members could no longer own commercial real estate, though they could keep businesses with revenue under $5 million — which could include a lot of pass-throughs. Warren’s bill hasn’t moved out of the Senate Finance Committee; an identical bill in the House also remains idle.
Warren’s plan faces an uphill climb, even among Democrats.
“It’s very difficult to get congresspeople to pass rules that make life exceedingly difficult for themselves,” said Beth Rotman, the money in politics and ethics director at Common Cause, a government watchdog in Washington, D.C.
But it’s happened in the past. In 1978, Congress passed the Ethics in Government Act in the wake of the Watergate scandal. It requires certain government officials, including members of Congress, to file annual financial forms — records Public Integrity used for this analysis. And in 2012, Congress passed a bill that made it unlawful to use insider information to trade stocks, required members to report stock trades within 45 days of the transaction, and required lawmakers to file disclosure forms online in a searchable, sortable, and downloadable database — so conflicts of interest would be easy to detect. (Within a year, Congress had removed the “searchable and sortable” language from the law. The financial disclosures are now available online, but they are not easily searched or sorted.)
Apparently just because of disclosure, stock trading by senators dropped by about two-thirds in the three years following the law’s enactment, according to a study by Craig Holman at the government watchdog group Public Citizen. But Holman said he found that some senators continued to trade in stocks in the very businesses they oversaw in their committees — a practice Public Citizen wants banned.
Ironically, it was Congress that passed laws that restrict other federal government officials from owning stocks or assets that would benefit from the officials’ decisions — or require them to recuse themselves from such decisions. Yet Congress has not passed legislation that bans itself from the same practice. “Congress should have the same rules put on them that the executive branch has,” said Rotman of Common Cause. “The executive branch conflict of interest rules are stronger.”
For the 2017 tax act, Holman of Public Citizen notes that about six years ago, researchers found that more than half of the members of Congress were millionaires. “They are passing tax laws and legislation that disproportionately favors the wealthy class,” Holman said. “And that means they personally benefit from this type of legislation.
“And, from what we’ve seen, especially from the tax cuts and jobs act of 2017,” he added, “that tax bill clearly favored the very wealthy over the rest of Americans. And that means it favored Congress over the rest of America.”
Alex Ellerbeck contributed reporting to this article.
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