David R. Henderson  

The New York Times Overpaid

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The New York Times, which apparently broke the law by publishing some of Donald Trump's 1995 tax return, overpaid a tax accountant.

Here's the relevant NYT statement in a news report by NTY reporters David Barstow, Susanne Craig, Russ Buettner, and Megan Twohey about Trump's taxes:

Tax experts hired by The Times to analyze Mr. Trump's 1995 records said that tax rules especially advantageous to wealthy filers would have allowed Mr. Trump to use his $916 million loss to cancel out an equivalent amount of taxable income over an 18-year period.

They hired people--and, notice, more than one--to tell them that when you have a big loss in one year, you can use it to offset income over 18 years? Any one who knows anything about taxes could have told them that. Hell, Google could have told them that.

For two excellent analyses of this issue, see Megan McArdle, "Trump's 1995 Return Shows Good Tax Policy at Work" and Robert P. Murphy, "Thoughts On Trump's 1995 Tax Return."

From Murphy:

To repeat, the "bombshell" NYT article tells us nothing about how much Trump paid in taxes in 1996, 1997, 1998, ..., 2009, or 2010. Rather, tax experts are merely explaining the obvious thing to do with a $916 million loss.

And from McArdle:
To judge from the reaction on Twitter, this struck many people as a nefarious bit of chicanery. And to be fair, they were probably helped along in this belief by the New York Times description of it, which made it sound like some arcane loophole wedged into our tax code at the behest of the United Association of Rich People and Their Lobbyists. They called it "a tax provision that is particularly prized by America's dynastic families, which, like the Trumps, hold their wealth inside byzantine networks of partnerships, limited liability companies and S corporations."

Every tax or financial professional I have heard from about the New York Times piece found this characterization rather bizarre. The Times could have just as truthfully written that the provision was "particularly prized by America's small businesses, farmers and authors," many of whom depend on the NOL to ensure that they do not end up paying extraordinary marginal tax rates -- possibly exceeding 100 percent -- on income that may not fit itself neatly into the regular rotation of the earth around the sun.


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CATEGORIES: Media Watch , Taxation




COMMENTS (18 to date)
Thaomas writes:

We would not have to have this discussion if Mr Trump had simply disclosed his tax returns like everybody else does. The secretiveness and the "smart" remark create the reasonable prior that he has done something at least out of the ordinary if not illegal. At the least, his tax returns could be a teaching moment in why we should be taxing consumption rather than business income.

Barrett writes:

I would also recommend John Hempton's recent blog post on Trump's TRs... Very interesting theory.

http://brontecapital.blogspot.com/2016/10/some-comments-on-new-york-times-story.html

Matt writes:

I think the more damning thing about the NYT article is not the contents of the article itself, but the Trump campaign's reaction to it. That they have not refuted the NYT's allegations, and are still standing firm on not releasing his returns, suggests that the campaign actually prefers this current narative to whatever the returns would actually show.

Greg G writes:

The Trump campaign is insisting that his handling of his taxes shows us he is "brilliant" and "a genius."

If that's really what these returns would reveal then what's the problem meeting the standard for transparency that even Richard Nixon set while he was under audit?

Until that story broke I had not realized how fortunate I was during 1995. My taxable income was almost $1 billion more than Trump's!

Ben H. writes:

I'm not even remotely an expert of tax law; I'm just repeating what I have read. My understanding is that in fact it is, as McArdle writes, "some arcane loophole wedged into our tax code at the behest of the United Association of Rich People and Their Lobbyists". The key point is that ordinary people – small businesses, farmers, authors – can only carry losses forward to offset profits within the same business. You can't offset unrelated income from a completely different source. Real estate developers, however, have a special loophole just for them, which allows them to use real estate losses to offset profits in completely unrelated businesses (his income from The Apprentice, for example). Again, no idea if this is true, but if it is, it does sound like a pretty tailor-made loophole that other people do not get to benefit from.

Sean O. writes:

Regarding the comment made by Ben H. Specifically, "Real estate developers, however, have a special loophole just for them, which allows them to use real estate losses to offset profits in completely unrelated businesses..."

This is a misrepresentation of the law. You are referring to the active versus passive investor rules. Active real estate investment is a business with specific criteria for classification as such (active management). Passive investment is just like it sounds: passive and without involvement in running the management of the property.

If the active real estate investor classification were to be removed from the tax code, it would be similar to requiring that a holding company that manufactures airplanes (profitably) and trucks (unprofitably) cease to apply losses in airplanes to its earnings in trucks.

Joe Kristan writes:

Sean O. is correct. Ben H is mixing up the "passive loss" rules with the net operating loss rules.

Anyone with a "passive" loss can only use it against other "passive" income -- in most cases, any other passive income. When the passive loss activity is sold, the losses are freed up and can offset any other income; if they exceed income, a net operating loss may be generated that can offset income in other years.

Losses are passive if either they are from an activity in which the taxpayer fails to meet a participation threshold (typically 500 hours, though it can be less), or if they are from rental activities. "Real estate professionals" can avoid the "per se passive" rule for real estate and apply the same participation tests that apply to other businesses.

For any non-passive business, losses can offset other income. That is fair, because the idea of an income tax is to tax "income." If a taxpayer loses money in his business, his income is lower, and logically his tax should go down.

JK Brown writes:
it would be similar to requiring that a holding company that manufactures airplanes (profitably) and trucks (unprofitably) cease to apply losses in airplanes to its earnings in trucks.

Sean O.'s point above reminded me that many of the corporate "good" programs those on the DemProg side induce in company operations are paid for in just that way, i.e., by using losses in the "whatever" initiative to offset profits in the company's productive divisions.

Should the this "loophole" be drawn tight, a lot of cash will disappear for the activists.

I wonder, has Tesla paid any taxes or are they still offsetting from their early losses?

Thaomas writes:

Just shows how unsatisfactory a business income tax is compared to a progressive consumption tax.

Kenneth Thomas Smith writes:

Trump obviously beat the bankers at their own games. And, he did so without a publicly-funded bailout !

WRD writes:

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MikeP writes:

I find both the reactions of the media and the reactions of Trump and his allies stunningly disingenuous.

It is not "avoiding taxes": it is writing down a loss.

And it is not "genius": it is doing your taxes.

TMC writes:

"Thaomas writes:
We would not have to have this discussion if Mr Trump had simply disclosed his tax returns like everybody else does."

Funny writing that after having spent years to get Obama produce proof he was born in the US - something that is actually required to do in order to be President.

How about we get all the Democrats to release their school transcripts, something they traditionally balk at.

William A Pauwels, Senior writes:

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Ron writes:

More good sense from Megan

http://bloggingheads.tv/videos/44038

Corey writes:

The Examiner doesn't say what law the Times broke by releasing the tax returns that they received anonymously. Is this just bluster? I haven't seen more detail anywhere.

Samuelz writes:

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