Look folks, we’re not fans of Donald Trump; see our earlier post questioning the wisdom of voting at all. But the commentary regarding the leaked excerpts from his 1995 tax return is appalling. In this post I’ll make four basic observations to get you thinking the right way about this issue.
(1) Most important: The NYT article that broke the story was incredibly misleading. I would guess that if you asked 1,000 people who read it, at least 990 of them would be quite confident that Donald Trump had “avoided taxes for nearly two decades” (that’s a phrase right from the headline).
And yet, actually, all we have are three pages from a single return filed in 1995. This was not an affidavit submitted by a fortune teller. Trump’s tax return from 1995 did not inform us how much he paid in income taxes in the 15 years following that.
Now, what the article does actually establish is that in 1995, Trump reported a loss of $916 million. So why is everyone acting as if we now have ironclad proof that Trump got rich while not paying a dime in taxes–as everyone from Hillary Clinton on down is claiming?
Here’s the money line from the NYT article: “Although Mr. Trump’s taxable income in subsequent years is as yet unknown, a $916 million loss in 1995 would have been large enough to wipe out more than $50 million a year in taxable income over 18 years.”
All they are saying is that a $916 million loss could be used to offset $916 million in other, net income spread out over 18 years. (My understanding is that the technical provisions back then would’ve allowed 3 years prior and 15 forward.) To repeat, the “bombshell” NYT article tells us nothing about how much Trump paid in taxes in 1996, 1997, 1998, …, 2009, or 2010. Rather, tax experts are merely explaining the obvious thing to do with a $916 million loss.
I’m trying to think of an analogy, and here’s the best one I’ve got: Imagine a Wall Street Journal headline saying, “Hillary Clinton Tax Returns Show She Could Have Purchased Up To 40,000 Copies of The Communist Manifesto.” And then when you read the story, it turns out that the WSJ writer grabbed Hillary’s take-home income in 1995 from her tax return, divided that dollar figure by the price of a single copy of The Communist Manifesto, and then reported how many copies of Marx & Engels’ tract she could have purchased–even though there was no evidence that she had bought even a single copy. My fictitious statement would be an accurate headline, and yet unbelievably misleading.
I was curious if anybody from the progressive left would have the decency to even bring this up. Ezra Klein at Vox did, when he wrote:
Here’s the thing I can’t get over about the New York Times’s bombshell story on Donald Trump’s tax returns: they don’t actually know what’s in his tax returns.
Look at their headline again. “Donald Trump Tax Records Show He Could Have Avoided Taxes for Nearly Two Decades, The Times Found.” The word “could” is doing a lot of work there.
Reread the first sentence. “Donald J. Trump declared a $916 million loss on his 1995 income tax returns, a tax deduction so substantial it could have allowed him to legally avoid paying any federal income taxes for up to 18 years.” “Could” is doing all the work there, too. It’s also possible that Trump paid taxes in all of those years!
Ah, so at least Ezra Klein–alone among progressive commentators that I encountered–saw the incredible slipperiness of the NYT hit piece. Surely Klein would denounce this sloppy move. I mean, imagine if a hawkish newspaper wrote something like, “Experts Say Iranian Centrifuges Could Be Used to Create Up to 18 Nuclear Bombs,” when in fact there were no evidence at all that a single bomb had been made? I bet Ezra Klein would see the problem in that kind of situation.
Alas, rather than chastising the NYT for grossly misleading the world, Klein actually congratulates them because they “bet correctly.” (I’m not making this up.) Since Trump didn’t release his actual tax records and show that they had gambled incorrectly, Klein concludes with his own baseless headline: “Whatever is actually in Trump’s tax returns is worse than what the New York Times says.”
No, Mr. Klein, we don’t know that. And at least the NYT headline was technically correct (though misleading), whereas yours could turn out to be totally false. For example, it’s possible that Trump had net income that absorbed the $916 million loss after (say) 13 years, and then he paid what he owed on net income afterward. So in that case, the actual situation would have been better than what the NYT implied, but it still might make sense for Trump to keep his returns hidden. After all, the editors of the NYT and the ostensible smart wonks at Vox don’t seem to know how journalism or accounting work. So why would Trump give them even more returns to drool over? Would that really be damage control to say, “Nuh uh, I only offset all federal income tax for 13 years, not 18” ?
(2) It’s not a clever trick to lose a billion dollars. Yet the supposed experts that the NYT piece quoted would make you think otherwise. For example: “‘He has a vast benefit from his destruction’ in the early 1990s, said one of the experts, Joel Rosenfeld, an assistant professor at New York University’s Schack Institute of Real Estate.”
Oh really? So do you think Warren Buffett read the NYT piece and thought, “Darnit, I wish I’d lost $916 million last year” ? Of course not. This whole episode is embarrassing.
If you still feel like Trump is cheating, realize you too can take advantage of this “vast benefit.” I’ll show you how you can avoid paying all federal income tax next year. First, figure out your annual income; let’s say it’s $85,000. Then start a consulting business, and spend $85,000 buying printer paper and hiring a receptionist. During the course of the year, do absolutely nothing with this business, but you instruct your employee (who is getting paid a salary) to rip up the paper and throw it in the garbage, before she goes to the store to buy some more. Come tax time, when your accountant tells you that your new business suffered an $85,000 operating loss, use that to offset your $85,000 in other income. Your net income is $0 and so you owe nothing. Voila! Hey man, don’t hate the player, hate the game.
(Note: To avoid any misunderstanding, I’m being facetious. Don’t do this, it would be incredibly stupid. Also, there are complexities with the tax code, with distinctions between capital losses and ordinary losses. I’m just trying to get you to see why losing a boatload of money to reduce your future tax liability is not something you would do intentionally.)
(3) In the grand scheme, it’s not a “tax loophole” to say that an operating loss reduces taxable income. Again, there are fine distinctions in the actual tax code, but 99% of the discussion around this topic ignores these subtleties. Both fans and critics of Trump are convinced that using a huge loss to offset other income is evidence of gaming the system.
No, this is simple accounting. It would be crazy if you couldn’t use losses from one year to offset gains in other years. After all, what’s so special about the time unit of one year? If a certain business lost $916 million from January through June, and then made $916 million in net income from July through December, so that on the year as a whole it exactly broke even… Would Hillary Clinton expect that business to pay tax on a “profit” of $916 million?
So then by the same token, if a certain individual reports a loss of $916 million in 1995, and then cumulative net income over the next decade of $916 million…why would Hillary Clinton expect that individual to pay income tax? The income tax is a tax on income. (That’s where its name comes from.) If, over the relevant time horizon, an entity actually has no net income (because early losses offset future gains), then it obviously shouldn’t pay income tax.
(If you actually want to see a calm, non-partisan discussion of “income” and how it relates to changes in capital value, see my article from a few years ago.)
(4) There is lots of talk about debt forgiveness and “debt parking”; people were passing around this post, for example. Yet here again, we have not a shred of evidence. This guy has no clue whether Trump “parked” his debt in a way that allowed him to reduce his taxes even though he didn’t actually experience a true loss.
So his speculations are fine as far as they go, but if we’re just going to make stuff up that Trump might have done, why stop with tax fraud? Just say, “Trump COULD HAVE Set Orphanage on Fire, Arsonists Explain.”