Why Won't Trump Forgo the "Corruption Premium"?
by Michael Dorf
In my latest Verdict column, I distinguish three risks that arise out of President-elect Trump's extensive business holdings: (1) That Trump will pursue his private interest at the expense of the public interest by, say, altering foreign policy or regulatory policy in exchange for favorable business deals from foreign governments or private actors, respectively; (2) that Trump and his family members will unjustly enrich themselves; and (3) that even the extensive appearance of corruption will spread corruption, which is a corrosive force. I argue that (1) and (3) are the bigger problems, not because I don't think Trump will use the power of the presidency to enrich himself and his family, but because I think the scale of damage from (2) is relatively small--at most a few tens of billions of dollars unjustly flowing into the Trump pockets. (I know, a billion here and a billion there and pretty soon we're talking about real money. I'm making a relative point.)
Trump has faced considerable criticism for failing to follow the practice of other wealthy elected officials who put their assets into a blind trust, thereby ensuring that they would make policy decisions based on the public interest. During the campaign and since the election, Trump and his spokespeople have said that he would turn over the running of his businesses to his adult children and that lawyers would look out to avoid conflicts of interest.
But this is far from an adequate solution. Even assuming that Trump himself plays no role in the running of his businesses--a heroic assumption given reports that he has continued to pursue his business interests since the election--Trump will know what sorts of policy decisions favor his businesses. Turning over day-to-day control over the businesses means that Trump might not know the impact of government policy on all of the details of his business empire, but he will surely know how, say, a change in the tax code on the depreciation schedule for golf courses will affect his businesses. Likewise, a foreign government that publicly announces that its diplomats will stay in Trump-branded hotels can thereby attempt to curry favor with Trump without his having to be involved in the running of those hotels.
Accordingly, turning over the day-to-day operation of the family businesses to other family members is nothing like creating a blind trust. It's not even like creating a vision-impaired trust.
Why doesn't Trump simply create a blind trust? The facile answer is that the nature of his business appears to preclude his doing so. A billionaire-turned-politician who made her fortune by founding a tech company can simply sell all of her ownership interest in the company and then give the assets over to a trustee to invest and manage. Neither the billionaire nor the public knows what investments are in her portfolio, and therefore there is no opportunity for those investments to distort her policy judgment. One might think that, by contrast, Trump is far too closely tied to his businesses to be able to divest ownership. Much of the value of the Trump empire is the Trump name, which itself is an association with the Trump lifestyle, as personified by Donald Trump. According to this objection, Trump can't put his assets in a blind trust because he is his assets.
But that answer is too facile. For one thing, it's often true that a wealthy person must sacrifice some of the value of her assets in order to govern without a conflict of interest. In the tech billionaire scenario, even after a company has gone public, part of its market capitalization may reflect the leadership of the founder. Think Apple during the Steve Jobs eras. When the founder divests, she somewhat undercuts the value of the company, including her erstwhile shares in it. Taking a haircut can be part of the price of providing honest public service.
Now, it can be objected, there's a very big difference between Apple and the Trump businesses. Even after Jobs gave up running the company and then died, Apple has been a very successful company. By contrast, the objection goes, the Trump businesses don't exist without Trump.
Yet this objection is dubious. For many years, a major element of Trump's business has been the licensing of the Trump name to properties that are owned and managed by completely separate parties. People nonetheless pay a premium for Trump-branded properties because they associate the name with luxury, even absent any direct connection to Donald Trump. Divesting Trump of the income stream from these licensing deals does not fundamentally change what is being paid for. Thus, the portion of the Trump business that consists in licensing the Trump name can readily be sold to a third party for the discounted present value of its future earning stream.
Meanwhile, those pieces of the Trump empire that consist in tangible goods and real property have a cash value. To the extent that part of their value comes from the Trump name, they also can be sold along with a license to use the name, much in the way that the pure licensing arrangements can be sold.
Is it possible that the Trump properties along with the license to use the Trump name would fetch a price somewhat lower than the full value of the Trump empire under Trump's supervision? Sure, but it's important to distinguish two different sorts of premium that would be forgone by Trump selling off his assets and the right to use his name.
One premium has to do with management. Despite Trump's spotty business record, there are undoubtedly people who believe that a "real" Trump property is worth more than one that is merely Trump branded. However, forgoing the premium associated with active management is very much in line with what other wealthy people forgo when they sell their identifiable assets and put the proceeds into a blind trust. So while the loss of the management premium could be real, asking Trump to forgo it as the price of public service does not treat him any differently from anyone else. His business is not unique in this regard.
However, there is a second premium that Trump would forgo by selling off his properties and the right to license his name: what I'll call the "corruption premium." By continuing to own properties that are clearly identified with him, Trump effectively invites foreign governments and private parties seeking favorable regulatory treatment to do business with Trump enterprises on more favorable terms than otherwise justified. If Trump were to sell his businesses, the buyer could not capture that additional income stream, because future business counter-parties would know that doing business with the Trump brand would no longer create a financial benefit for the president. Thus, the sale price would not include the discounted present value of that additional income stream. Selling would require Trump to forgo the corruption premium.
Yet that is exactly the point. Surely even Trump and his supporters do not think that he is entitled to receive the corruption premium. Why, then, is Trump unwilling to forgo it by selling his assets and the right to license his name for at most the same sort of discount that any wealthy person who has been closely associated with a particular company would have to absorb as the price of avoiding the fact or appearance of corruption?
Here's a useful thought experiment. Suppose that, after the election of 2008, Barack Obama had decided to cash in immediately. Despite having no prior involvement or experience running hotels or golf courses, Obama sold the rights to his name to a chain of reasonably well-managed hotels and golf courses under a deal in which he earned 20% of net operating profits. Would anybody think that this was anything but corrupt? And yet the money Obama would have earned from Hotel Obama and the Obama National Golf Course would be no different from the money that Trump will earn due to the corruption premium.
Trump has shown no interest in substantially distancing himself from his business interests, much less in divesting his current assets in favor of a blind trust. Given Republican control of Congress and his own impending control over the executive branch, he can probably get away with pocketing the corruption premium. That still doesn't make it remotely acceptable.
In my latest Verdict column, I distinguish three risks that arise out of President-elect Trump's extensive business holdings: (1) That Trump will pursue his private interest at the expense of the public interest by, say, altering foreign policy or regulatory policy in exchange for favorable business deals from foreign governments or private actors, respectively; (2) that Trump and his family members will unjustly enrich themselves; and (3) that even the extensive appearance of corruption will spread corruption, which is a corrosive force. I argue that (1) and (3) are the bigger problems, not because I don't think Trump will use the power of the presidency to enrich himself and his family, but because I think the scale of damage from (2) is relatively small--at most a few tens of billions of dollars unjustly flowing into the Trump pockets. (I know, a billion here and a billion there and pretty soon we're talking about real money. I'm making a relative point.)
Trump has faced considerable criticism for failing to follow the practice of other wealthy elected officials who put their assets into a blind trust, thereby ensuring that they would make policy decisions based on the public interest. During the campaign and since the election, Trump and his spokespeople have said that he would turn over the running of his businesses to his adult children and that lawyers would look out to avoid conflicts of interest.
But this is far from an adequate solution. Even assuming that Trump himself plays no role in the running of his businesses--a heroic assumption given reports that he has continued to pursue his business interests since the election--Trump will know what sorts of policy decisions favor his businesses. Turning over day-to-day control over the businesses means that Trump might not know the impact of government policy on all of the details of his business empire, but he will surely know how, say, a change in the tax code on the depreciation schedule for golf courses will affect his businesses. Likewise, a foreign government that publicly announces that its diplomats will stay in Trump-branded hotels can thereby attempt to curry favor with Trump without his having to be involved in the running of those hotels.
Accordingly, turning over the day-to-day operation of the family businesses to other family members is nothing like creating a blind trust. It's not even like creating a vision-impaired trust.
Why doesn't Trump simply create a blind trust? The facile answer is that the nature of his business appears to preclude his doing so. A billionaire-turned-politician who made her fortune by founding a tech company can simply sell all of her ownership interest in the company and then give the assets over to a trustee to invest and manage. Neither the billionaire nor the public knows what investments are in her portfolio, and therefore there is no opportunity for those investments to distort her policy judgment. One might think that, by contrast, Trump is far too closely tied to his businesses to be able to divest ownership. Much of the value of the Trump empire is the Trump name, which itself is an association with the Trump lifestyle, as personified by Donald Trump. According to this objection, Trump can't put his assets in a blind trust because he is his assets.
But that answer is too facile. For one thing, it's often true that a wealthy person must sacrifice some of the value of her assets in order to govern without a conflict of interest. In the tech billionaire scenario, even after a company has gone public, part of its market capitalization may reflect the leadership of the founder. Think Apple during the Steve Jobs eras. When the founder divests, she somewhat undercuts the value of the company, including her erstwhile shares in it. Taking a haircut can be part of the price of providing honest public service.
Now, it can be objected, there's a very big difference between Apple and the Trump businesses. Even after Jobs gave up running the company and then died, Apple has been a very successful company. By contrast, the objection goes, the Trump businesses don't exist without Trump.
Yet this objection is dubious. For many years, a major element of Trump's business has been the licensing of the Trump name to properties that are owned and managed by completely separate parties. People nonetheless pay a premium for Trump-branded properties because they associate the name with luxury, even absent any direct connection to Donald Trump. Divesting Trump of the income stream from these licensing deals does not fundamentally change what is being paid for. Thus, the portion of the Trump business that consists in licensing the Trump name can readily be sold to a third party for the discounted present value of its future earning stream.
Meanwhile, those pieces of the Trump empire that consist in tangible goods and real property have a cash value. To the extent that part of their value comes from the Trump name, they also can be sold along with a license to use the name, much in the way that the pure licensing arrangements can be sold.
Is it possible that the Trump properties along with the license to use the Trump name would fetch a price somewhat lower than the full value of the Trump empire under Trump's supervision? Sure, but it's important to distinguish two different sorts of premium that would be forgone by Trump selling off his assets and the right to use his name.
One premium has to do with management. Despite Trump's spotty business record, there are undoubtedly people who believe that a "real" Trump property is worth more than one that is merely Trump branded. However, forgoing the premium associated with active management is very much in line with what other wealthy people forgo when they sell their identifiable assets and put the proceeds into a blind trust. So while the loss of the management premium could be real, asking Trump to forgo it as the price of public service does not treat him any differently from anyone else. His business is not unique in this regard.
However, there is a second premium that Trump would forgo by selling off his properties and the right to license his name: what I'll call the "corruption premium." By continuing to own properties that are clearly identified with him, Trump effectively invites foreign governments and private parties seeking favorable regulatory treatment to do business with Trump enterprises on more favorable terms than otherwise justified. If Trump were to sell his businesses, the buyer could not capture that additional income stream, because future business counter-parties would know that doing business with the Trump brand would no longer create a financial benefit for the president. Thus, the sale price would not include the discounted present value of that additional income stream. Selling would require Trump to forgo the corruption premium.
Yet that is exactly the point. Surely even Trump and his supporters do not think that he is entitled to receive the corruption premium. Why, then, is Trump unwilling to forgo it by selling his assets and the right to license his name for at most the same sort of discount that any wealthy person who has been closely associated with a particular company would have to absorb as the price of avoiding the fact or appearance of corruption?
Here's a useful thought experiment. Suppose that, after the election of 2008, Barack Obama had decided to cash in immediately. Despite having no prior involvement or experience running hotels or golf courses, Obama sold the rights to his name to a chain of reasonably well-managed hotels and golf courses under a deal in which he earned 20% of net operating profits. Would anybody think that this was anything but corrupt? And yet the money Obama would have earned from Hotel Obama and the Obama National Golf Course would be no different from the money that Trump will earn due to the corruption premium.
Trump has shown no interest in substantially distancing himself from his business interests, much less in divesting his current assets in favor of a blind trust. Given Republican control of Congress and his own impending control over the executive branch, he can probably get away with pocketing the corruption premium. That still doesn't make it remotely acceptable.