by Neil H. Buchanan
The blockbuster political story of the weekend was the revelation in The New York Times of some tantalizing information about Donald Trump's taxes. The bottom line: Trump apparently lost almost one billion dollars in 1995, and he could have used that one-year loss as a way to pay zero dollars in taxes -- not just in 1995, but for a total of eighteen years.
Trump's apologists immediately tried to spin this story as evidence that their man is, as Rudolph Giuliani put it, "a genius." (Whatever expertise Giuliani may or may not have, by the way, clearly does not include knowledge of the tax laws. But why let that stop him?)
The Trump camp's story is that only a savvy businessman who knows more than everyone else about the tax code could have done what Trump did to avoid paying taxes. We should all be so lucky, Trump's people say, as to have this man running our country like he runs his business.
This is utter nonsense. Based on what we currently know, two things seem most likely. Either Trump engaged in actual tax fraud, or he used some simple and well-known provisions of the tax code that uniquely benefit wealthy people, business owners, and especially people in the commercial real estate trade.
Either way, Trump is no genius. And remember, the starting point for all of this is that he lost nearly a billion dollars in one year. The only question is how that huge loss can be used to reduce taxes for someone like Trump. But we should not lose sight of the fact that losing huge amounts of money is not consistent with Trump's preferred self-image as a great business mogul.
Before I get into the elements of the tax story here, it is worthwhile to recall why this news is such a huge deal now, only five weeks before Election Day. Trump has been under pressure for months to follow tradition and release his tax returns. He has refused, offering a series of evasions and lies as he has continually tried to change the subject.
Reporters have been asking me (and many other tax professors) for months why Trump is being so stubborn. The answer is that what he is doing makes no sense, unless there is something bad in the returns. But it would have to be truly bad, because the innocent explanations -- maybe he had not paid any taxes, maybe he had no charitable deductions, and so on -- did not seem to justify the secrecy.
Indeed, any reasonable person advising Trump would have told him that dragging out the story makes it worse. The old line, "It's the coverup, not the crime," would have been especially apt. If Trump had released his tax returns on May 4, which is the day after he effectively clinched the Republican nomination, this would all be old news by now -- if, that is, there is nothing bad in the returns. (For all we know, by the way, Trump might in fact have received that advice -- and promptly ignored it.)
Inevitably, something like what just happened was going to happen. That is, because Trump has refused to provide complete information, he now finds himself the subject of speculation based on a trickle of very incomplete information. And that incomplete information, as I noted above, is not enough to eliminate the possibility that he moved well beyond "smart tax strategies" into full-on criminal evasion.
But let us be generous and accept the idea that this new information proves only that Trump might have reduced his taxes to zero through completely legitimate means. What are those means? Again, the salient larger point is that Trump's business losses could be used to his advantage in ways that are simply not available to the middle class.
In an Associated Press story yesterday, I was quoted as saying that a person "can be middle class and be ten times smarter and not be able to do the things he did." To put the point even more bluntly, even Stephen Hawking cannot turn the tax code into a piggy bank for the middle class, whereas anyone with even one semester of tax law under his belt could do what Trump did.
Trump, then, simply benefited from tax provisions that are visible to the naked eye. If Trump is a genius for using well known tax provisions to reduce his taxes, then everyone who takes the mortgage interest deduction should apply for membership in Mensa.
Recall, by the way, that although Trump often claims that he alone knows the tax code better than anyone else, he also (as the story in The New York Times makes clear) has admitted that he is not a details-oriented person. As I wrote in a column back in July, Trump claims (no surprise here) that "I have great people" doing his taxes. If there was any genius at work, it was not emanating from Trump's head.
But as I noted above, the innocent version of this story simply involves Trump's tax lawyers using plain-vanilla provisions in the tax code that are no mystery to anyone. By the middle of my one-semester introduction to tax law course, I have covered nearly all of these issues. Every other basic tax class in the country surely does the same. The real estate-specific elements are easy to pick up in any practitioner's manual.
The story in The New York Times emphasizes that Trump's huge loss in 1995 could have been turned into a "net operating loss" that, under the tax rules at the time, could have been spread over as many as eighteen years to reduce taxable income to zero. (That rule, by the way, has since been expanded by Congress to twenty-two years.)
In principle, of course, there is nothing in the code saying that middle class people cannot use the net operating loss provision for themselves. But what constitutes a net operating loss is business-related, so most people who do not own their own businesses are effectively excluded from the benefits of that provision. Again, even Stephen Hawking could not figure a way around that.
The tax code is rife with many such provisions that effectively target benefits at rich people, especially people who own property. For example, the concept of "like-kind exchanges" (also covered in a one-semester introduction to tax law) allows wealthy property owners to delay paying taxes for years or decades, but its provisions are written such that everyday taxpayers are unable to use those provisions in the way that someone like Trump can.
Many people own no property at all, and the vast majority of those who do own property own their own home. If a homeowner is forced by circumstances to sell when the market is down, however, she cannot even deduct the loss in the year of the sale, much less spread that loss over decades.
I am not saying that that provision should necessarily be changed, but I am saying that we should understand that Trump's supposed genius involves using tax provisions that only a tiny number of people could ever use to their advantage.
Given the size of Trump's losses, it seems likely that his properties were going down in value at the time. (It is an open question how he managed to get out from under his debt, which he used to buy his properties, without having to declare the cancellation of indebtedness on his taxes.) But it is also possible that his losses were from operating his casinos, which were themselves in the process of failing.
But this again provides a good example of how the tax system treats rich people better than everyone else. A person who gambled in one of Trump's garish casinos would, under longstanding tax rules, not be able to deduct his net gambling losses on his taxes, even in the year of the losses.
In other words, when Trump lost money on his gambling operations, the tax code allowed him to use those losses to reduce his taxes to zero, while his unlucky customers were actually losing their own money and getting no tax benefit from doing so.
Because of all of these rules, it is not even accurate simply to say that "rich people" get special benefits built by a compliant Congress into the tax code. If a person is lucky enough to have a salaried job with annual pay of, say, $500,000 or even five million dollars, she would count as rich in most people's eyes. But even such a fortunate person, no matter how smart she might be, would not have access to the tax advantages that I am describing here, any more than a middle-class worker with a $50,000 salary does.
Finally, it is important to point out two further considerations. First, Trump frequently repeats an all-purpose excuse that he has a business or "fiduciary" responsibility to take advantage of all available legal strategies to maximize his income. In the first presidential debate, for example, he said: "I take advantage of
the laws of the nation, because I’m running a company. My obligation
right now is to do well for myself, my family, my employees, for my
We are talking, however, about Trump's personal tax returns, not business returns. He operates under no legal requirement to make his already-rich family even richer, especially by abusing labor or bankruptcy laws. Many wealthy people use their wealth for the public good, by paying their taxes and by engaging in philanthropy. Nothing in the tax story tells us that Trump is required to do what he is doing. This is a matter of choice on his part.
Second, and more interestingly, Trump is saying that his supposed (but actually nonexistent) tax savvy uniquely qualifies him to be president. But as I argued in my column in July, and as tax professor Adam Chodorow similarly wrote in Slate yesterday, Trump is not adopting a "To Catch a Thief" approach to tax law.
What I mean here is that Trump could, if he wanted to, say something like this: "I alone know all of the ways in which it's possible to game taxes in ways that allow rich people to get away with the tax equivalent of murder. This must stop, and here is my plan to do so."
Trump's underling Chris Christie has asserted something along those lines, but even a former advisor to Republican presidential candidates was quoted in another New York Times article saying that Trump "hasn’t proposed anything to address these loopholes."
This is not like war, where Trump claims (absurdly) that he cannot tell the enemy how he is going to defeat them, so we have to trust him. Trump could do everyone a service not only by releasing his tax returns but also by instructing his "great people" to tell everyone how the tax code is rigged against honest people who do not own commercial real estate.
Trump, of course, has done no such thing. He is not bragging about paying no taxes to move us to action on real tax reform. He is bragging because he wants us to say, "What a smart guy! I sure wish I could be like him." But he is not smart. He is the poster child for the pampered beneficiaries of the most narrow special-interest tax breaks, and he has shown no interest in changing that.