Sunday, October 02, 2016

Trump's $900 million tax loss

People who are quoted in a Politico article say pretty much what I would have:

"Tax experts said there is nothing surprising about the writeoffs Trump may have used to avoid paying federal income taxes for nearly two decades, and that the bigger question is what generated the large losses he reported.

"Losses like the $916 million that Times said Trump claimed in 1995 could at that time be used to offset taxes in the three prior tax years and 15 years going forward. But it’s unknown at this point exactly how Trump accrued those losses, which he claimed during a ruinous financial time for his businesses, and how legitimate they were.

"Nobody thinks that’s wrong,” Howard Abrams, director of tax programs at the University of San Diego School of Law, said of the tax provisions Trump appears to have used. “The question is what generated the $900 million loss.”

“The billion-dollar NOL [net operating loss] isn't evidence of shady tax behavior per se; in fact, I'm sure the IRS audited it,” Alan Cole, an economist at the conservative-leaning Tax Foundation tweeted. “It's evidence of bad business.”

Joe Thorndike, director of the Tax History Project at Tax Analysts, said: “Obviously the optics are less than ideal from a political standpoint. But on its face, using losses to offset gains is routine and uncontroversial. In fact, it's part of what makes the income tax work as well as it does.” 

The tax advantages that the real estate industry can exploit are well known to tax experts. For instance, Abrams said, while commercial real estate historically increases in value, owners can take deductions as if it were depreciating.

“It seems that Trump may have been part of Mitt Romney's infamous ‘47 percent,’” Thorndike said. “But like many other nonpayers, his status could have been a function of deliberate tax policy decisions, not creative tax avoidance or sneaky ‘loopholes.’”

"Abrams agreed. “If the deductions are overly favorable, they need to change the law,” he said."

In sum, a few main points. Horrid business decisions (since those were good times economically) generated large economic losses.  Favorable tax rules, such as depreciation deductions for property that is actually appreciating economically (and that one can then borrow against, generating interest deductions) could have made the tax losses larger than the economic losses. One thing I do wonder about is why Trump's bankruptcies didn't require reduction of "tax attributes" such as net operating losses. E.g., if you wipe out a $100 million debt due to bankruptcy, you escape having $100 million in "cancellation of indebtedness income" in exchange for having tax attributes such as NOLs reduced by that amount. (But there are tricks that taxpayers can play to minimize that.)

The reason why using NOLs is not inherently objectionable can be explained as follows. Say Trump, being an incompetent businessman but good at "branding," loses $900 million when he actually tries to run businesses, but then makes $900 million by licensing his name. Over time his net income is actually zero.  So taxing him the same (i.e., zero) as his net equal in business savvy, the guy who makes exactly zero each year, is not inherently inappropriate.

That said, losing so much money that you don't have to pay tax for a long while upon gradually recovering it doesn't exactly show that you're "smart."  And it's clearer than ever that, without daddy's original stake, this guy would likely be washing dishes somewhere, and wishing he had saved something for his retirement.


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