Thursday, October 01, 2020

Trump versus Apple in the tax avoidance realm

 Apparently some people have been saying: It's not so unusual that Trump should use enormous losses to pay very little federal income tax. Lots of rich people and big, profitable corporations do it. E.g., consider how companies like Apple, Amazon, Facebook, and Google may earn huge profits through operations that are run out of the US, and yet pay little federal income tax here.

This view is mistaken in several respects, although the proper takeaways can be a bit complicated. Here are some of the main distinctions that a simple analogy between the two misses:

1) Trump's "methodology" of having huge losses that offset the gains is, I believe, quite unusual - other than in eras characterized by the use of corporate tax shelters (which Treasury and the IRS got under control more than a decade ago). The reason is, it's hard to generate huge losses here to offset large profits there, absent corporate tax shelters, unless you are actually losing a lot of money through cash-hemorrhaging businesses. This, of course, is Trump's "method," but as I discussed in my Just Security piece, it is not one that anyone should want to use.

2) The fact that Trump actually was losing tons of money (we think) lessens the extent to which he was getting away with improper tax avoidance. Those who are bad enough at business to lose a lot of money should pay less tax than those who are better at it, all else equal.

3) From a tax standpoint, what was wrong with Trump's returns, even with only the limited checking from outside sources that the Times was able to do, wasn't his having large losses that he deducted, but his taking a number of positions that appear to go beyond mere aggressiveness to clear erroneousness, of a sort that is plain enough to raise concerns (meriting further investigation) about fraud. I describe several of these items in the Just Security piece.

4) What do companies like Apple, Amazon, Facebook, and Google do to avoid US federal income tax? Well, a lot of things, but perhaps the main one is contriving ways to have taxable income that arguably arose as an economic matter from productive activity in the US arise for tax purposes in foreign jurisdictions, often tax havens, in which these companies have subsidiaries. 

5) This is a totally different method than Trump uses. It suggests that their tax avoidance - defined as paying very little tax in relation to economic income - is much greater than Trump's. They are actually good at business, as well as at tax planning. But most of us would agree that there is a big difference between legal tax avoidance and claiming improper deductions.

6) Are all of the positions that these companies take, and that the IRS fails to challenge successfully, legally correct? That is rather unlikely, since they presumably take positions that might, as a probabilistic matter, be rejected if fully vetted and understood. Even if they never take a position (at least without requisite disclosure) that is not reasonably judged by their lawyers to be "more likely than not" to prevail, legal uncertainty is their friend. This is especially so with an overworked, underfunded IRS that can't afford to hire the very best tax experts to comb through everything, and that inevitably knows less about these companies' facts than they know about their own facts. But despite all this, I hope I am right in concluding that these companies are unlikely to come anywhere close to committing criminal tax fraud.

7) Back to Trump, his being a bad businessman does not as such involve improper (or, for that matter, clever) tax avoidance. But his tax returns, as described by the Times, appear to show BOTH improper deductions and embarrassing (but not improper) losses.

8) Here is another thought that someone expressed to me recently. Do we have any idea whether, as a general matter, the numbers shown on Trump's returns are real ones, as opposed to being made up? No, we don't know that, except insofar as they are independently verified. Simply making up numbers to reduce tax liability is as central a case of tax fraud as one can imagine, but if he was doing that we would need other evidence to show the reported numbers' falsity. In this regard, to paraphrase Reagan's famous words to Gorbachev, "Trust but verify," here I wouldn't trust but I would want to verify pretty much everything.

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You eighth point is absolutely correct. That's why the NY grand jury and any other investigatory body has to have the entity returns from which the numbers on the 1040 are derived. (And, of course, the entity returns from which the numbers on the immediately preceding entity returns are derived, and the entity returns from which those entity returns are derived, and so on.)

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