Tuesday, October 4, 2016

Trump's Taxes and The Otter Defense

I didn't post anything yesterday about the piece in the NYT over the weekend that detailed Trump taking a $916 million dollar loss on his taxes in 1995, which he could carry forward into future years to offset income earned then. But everyone seems to be talking about it, and some people seem to think it's a "bombshell", so I guess I need to write about it.

Is this a big deal? I don't really think so.

Our federal income tax system is a tax on income a/k/a the money you earn. It's not a tax on the money you already have, or your wealth. If you've got a billion dollar net worth and don't earn any money in a given year, then you don't pay any income taxes, because you don't have any income. The income tax has nothing to do with what you have, it taxes your income.

Accordingly, the federal government is sort of like your partner in business. If you make a lot of money in a given year and have a large income then you pay a larger amount, in the form of an income tax, to the Feds. If you do well, the Feds do well.

Therefore, it makes sense on a policy basis to have the Federal government, as your "partner" also share in your losses. If your business does poorly, then the Federal government has decided that you're entitled to take that loss as an offset against future taxes.

For example: If you lose $5 million dollars in year 1, and then earn $5 million dollars in year 2, how much taxes should you pay over the two year period? Well, you've effectively earned nothing, since your entire second year just got you back to even after losing the same amount in year 1. Accordingly, our tax system reflects that reality and allows business owners to offset losses.

That's what we're dealing with here. In 1995, Trump declared to the IRS that he lost a lot of money. I'm sure the IRS audited that to double check him. As long as he's telling the truth about his loss, then he's legally entitled take the deduction and offset any future gains.

If you don't like this system, then that's fine. Make an argument why the net operating loss deduction should be eliminated from our tax code. See if you can get Congress to pass that. Go for it. But it's a longstanding deduction, makes policy sense, and is fairly commonly known. We're not talking about some weird tax voodoo here,

So yeah, Trump may have had a lot of money in wealth when he took the loss, and it may be the case that he had money to fall back on anyway. But a loss is a loss, and it's deductible.

The issue isn't whether Trump took a tax deduction. He did. But you can't hold a taxpayer responsible for the entire tax code. For if you do...

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