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 an annual “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.”
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