Now we know: Donald J. Trump racked up losses so
huge in the early 1990s that he wouldn’t have had to pay federal or New York
State income tax on nearly a billion dollars in income.
None of this seems to have made the slightest dent in
Mr. Trump’s opulent lifestyle over the years. At the nadir of his personal
financial crisis in the early 1990s, his lenders put him on a monthly “budget” of $450,000 in personal
expenses — more than enough to sustain his lifestyle of lavish homes, private
jets, country clubs and golf courses — even as he was using the tax code to
avoid paying any federal income tax.
It’s hard to imagine a starker contrast with the vast
number of Americans who struggle to both pay taxes and make ends meet, or a
more damning indictment of a tax code that makes that possible.
“If it wasn’t clear before, it is now: The tax code is
tilted toward the rich in its statutory framework, its exceptions, and in how
it is enforced and administered,” said Steven M. Rosenthal, a real estate tax
specialist and senior fellow at the Urban-Brookings Tax
Policy Center.
“The American public,” he said, “needs to wake up and
send a message that the tax code should be written to generate revenue and
enforced to collect it, not to favor wealthy real estate developers and other
special interests and their lobbyists.”
If Mr. Trump’s pattern
of generating losses and using them to offset other income has continued, as
seems likely, it’s obvious why he has not released his tax returns: not because
he is being audited, or because the returns are too complicated, but because he
hasn’t paid any taxes.
The latest revelations, in an article published by The
New York Times, make a “compelling” case for more disclosure, said Michael
Knoll, professor of law and real estate at the University of Pennsylvania Law
School. “If his loss was so massive that he didn’t pay federal income tax for
15 to 20 years, that’s surprising. It’s even more surprising that someone in
that situation would run for president.”
Even if Mr. Trump was correct when he asserted that he only took advantage of
what the law allows, such
a huge loss undermines one of his central campaign themes, which is that he is
an astute and successful businessman.
Given the size of the loss that Mr. Trump reported,
“it’s clear he was a spectacularly disastrous businessman,” Mr. Rosenthal said.
Douglas Holtz-Eakin, an economist who served as
director of the Congressional Budget Office and is now president of the American Action Forum, a conservative pro-growth advocacy group, agreed:
“It’s either a unique combination of bad luck or he’s a terrible businessman or
both. I don’t understand how you can lose a billion dollars and stay in
business.”
All of this makes it even more imperative that Mr.
Trump disclose more tax information, including more current returns as well as
earlier returns that would explain how, by 1995, he had a huge operating loss
carried forward from earlier years that approached a billion dollars.
“This absolutely strengthens the case for disclosure,”
Mr. Rosenthal said. “A loss of that magnitude raises all kinds of red flags.”
Mr. Trump’s records indicate that there was an
attached statement that explained the net operating loss being carried forward.
“That’s so tantalizing,” Mr. Holtz-Eakin said. “I’d love to see that
statement.”
Mr. Trump, of course, is
free to release it. It would probably answer many questions about the source of
the losses. It would also help explain whether these were legitimate business
losses or “accounting gimmicks and abusive tax shelters,” as Mr. Rosenthal put
it.
There are a number of accounting tactics that Mr.
Trump might have used to generate such a huge loss, some of them considered
highly aggressive and of dubious legitimacy, accounting experts said.
Given the dire state of Mr. Trump’s businesses at the
time, he might have been able to record write-downs of assets under a doctrine
known as “abandonment,” an aggressive accounting tactic used when an investor
walks away from a worthless or nearly worthless asset and writes off the entire
capital investment in the property.
There is also the question of Mr. Trump’s debt. Mr.
Trump personally guaranteed $832 million of debt related to his casinos and
other assets. Under tax code provisions available to real estate developers, he
could take the full amount as a deduction even if he didn’t invest a dime of
his own money.
Ordinarily, that deduction would be recaptured when
the debt was forgiven or the underlying assets sold. If the debt were forgiven,
Mr. Trump would have to report that as income. But there are various
exceptions. If Mr. Trump was insolvent at the time — if his debts exceeded his
assets — he might have avoided having to report the forgiveness of debt as
income. Of course, if that was the case, it further undermines his claims to
being an astute businessman.
There are other provisions, too, that might have
allowed Mr. Trump to deduct the loans but never have to report them as income.
Real estate developers are also uniquely able to
realize losses as soon as they occur, but defer gains, often indefinitely,
through such tactics as like-kind exchanges. “It’s heads Trump wins, and tails
the government loses,” Mr. Knoll said.
Large as the loss was, Mr.
Trump didn’t even need to use any of his loss carry-over in 1995. As I previously suggested, he was also able to use the
tax breaks available to active real estate developers to report a loss of
nearly $16 million from “rental real estate, royalties, partnerships, S
corporations, trusts, etc.,” which are the forms in which Mr. Trump holds most
of his assets.
Mr. Trump’s records show that
he used that loss to offset his ordinary income. Mr. Trump reported $3.4
million in business income, $7.4 million in interest and a paltry $6,000 in
wages and salaries, all of it sheltered from tax by his loss.
The rest of us can’t do that,
unless we fit the narrow criteria for active real estate developers.
“There’s probably no special
interest that’s more favored by the tax code than real estate,” Mr. Rosenthal
said. In examining the often-lauded tax reforms of 1986, he found “all these
carve-outs for real estate interests.”
“It’s a monument to lobbying
and the influence of real estate” interests, he said.
Mr. Holtz-Eakin added: “It’s
unbelievable. It’s due to the unique weirdness of the American love affair with
homeownership,” which was used to justify these tax breaks.
As Mr. Trump has said, he
should be uniquely positioned to reform the system. “Mr. Trump knows the tax
code far better than anyone who has ever run for president and he is the only
one that knows how to fix it,” his campaign said in a statement to The Times.
Hope Hicks, a Trump
spokeswoman, declined to comment beyond the campaign’s earlier response to The
Times.
Mr. Trump hasn’t hesitated to
castigate corporate executives and Wall Street money managers for taking
advantage of tax loopholes, and has proposed eliminating the favorable treatment
of their income, a tax benefit that pales in significance to the magnitude of
his.
Yet Mr. Trump chose not to
release his returns, and his tax proposals would not close a single loophole
that benefits him. On the contrary, he would make the tax code even more favorable to real estate
developers like himself. He would lower the tax rate to 15 percent for limited
liability companies and partnerships, the very entities in which Mr. Trump
holds most of his assets.
“He hasn’t proposed anything
to address these loopholes,” Mr. Holtz-Eakin said.
At the broadest level, Mr.
Trump’s tax avoidance undermines the entire tax system, which rests on the
foundation that every citizen pays a fair share.
“Our whole system is based on
voluntary compliance,” Mr. Rosenthal said. “How will people react when they see
a self-proclaimed billionaire like Trump pays no tax? Why should they pay?”
Mr. Rosenthal said it reminded
him of the famous quote attributed to the hotel owner Leona Helmsley: “Only the
little people pay taxes.”
Correction: October 4, 2016
The Common Sense column on
Monday, about tax loopholes employed by Donald J. Trump, described incorrectly
the $450,000 limit for personal expenses that Mr. Trump’s lenders imposed on
him in the early 1990s. That was the limit for a month, not a year.
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