Home Politics Donald Trump's Losses Offset His Profits On His Tax Bill. Err, Yes?...

Donald Trump’s Losses Offset His Profits On His Tax Bill. Err, Yes? And?



The New York Times gets very het up at the idea that Donald Trump’s business losses have been put against his profits so as to calculate his tax bill. Well, yes, that’s how tax goes. It’s even what the New York Times does itself. Here’s one from the sticky back plastic earlier:

Donald Trump’s Tax Returns – You Make $ Billion Loss You Get A $ Billion Tax Credit. And?

The New York Times has three pages of Donald Trump’s tax returns for the 1995 year. In which it appears that The Donald made, for income tax purposes, a near $1 billion loss that year. At which point much speculation about how this would mean a tax credit, a loss which could be carried both forward and backwards through time to offset against other potential tax bills. Well, yes, this is the way the tax system works. Further, it’s the way the tax system ought to work. Not even just that–there’s no way we could have a reasonable system of taxing business income which did not work in this manner. The economics of how business taxation works is, and has to be, based upon cumulative income. Thus absolutely any system of business taxation is going to, must, allow the offsetting of losses against profits.

In order to grasp this basic point leave aside that it’s Trump, leave aside that it’s personal income taxation and even that it’s in real estate. Just imagine that all of this was taking place inside a C Corporation, one that pays the corporate income tax. If such a corporation lost a $ billion would there be a $ billion tax credit? Yup, there would be. We can even show this from the Google and Motorola Mobility story. Yes, of course, the precise rules are different but the same general effect exists. A business, whether it is done as a C corporation, a partnership, an S corporation, as an individual, the general rule is always going to be the same. Taxation applies to the cumulative income, the net of profit and loss, not to income or profits only. And there’s no way that we could have a useful system of taxing business income if we didn’t do it this way just because of the simple economics of how business works.

That’s not going to stop a lot of shouting about this of course:

October didn’t wait more than 24 hours before delivering a surprise. It came in an envelope delivered to the New York Times containing portions of Donald Trump’s tax returns, which he has been refusing to release.

Not really quite right, Trump has been refusing to release recent returns, which is what is normally done. These returns found are from 1995, and there’s no tradition that returns that far back be released. However, what has been found seems to show the following:

Donald Trump reported a nearly $1 billion loss on his 1995 tax returns and could therefore have avoided paying federal income taxes for almost two decades, the New York Times reported on Saturday, putting another unexpected exclamation point on what had already been one of the worst weeks for any presidential nominee in recent memory.

At which point the interesting question is whether a billion dollar loss should lead to paying no tax or not? And the obvious answer is that yes, obviously, it should. Because business taxation must, only can be, based upon cumulative income, not just income in any one specific time period. Thus this part of the NYT piece is a little, well, let’s say lascivious in its enjoyment:

Donald J. Trump declared a $916 million loss on his 1995 income tax returns, a tax deduction so substantial it could have allowed him to legally avoid paying any federal income taxes for up to 18 years, records obtained by The New York Times show.

The 1995 tax records, never before disclosed, reveal the extraordinary tax benefits that Mr. Trump, the Republican presidential nominee, derived from the financial wreckage he left behind in the early 1990s through mismanagement of three Atlantic City casinos, his ill-fated foray into the airline business and his ill-timed purchase of the Plaza Hotel in Manhattan.

We don’t usually think that losing a billion dollars confers benefits but that’s the NYT for you.

So, why must our tax system charge taxes on cumulative income from business? Leave aside all of the speciality about real estate and so on, my colleague Robert Wood will be much better than I am on that. Just consider the underlying economics here. And this applies whatever the legal form surrounding the business. This is going to be true of a sole trader, someone self-employed, a partnership, an S corporation or a C corporation. Not in each and every detail of course, but the general idea will stand for all forms of business organisation.

We all know that it costs money to start up in business. You’re, barring some miracle or another, going to make a loss at the beginning. So, when in (just imagine) Year 3 you start to make a profit should you be taxed only on that profit in year 3? Well, if we do that then we’re going to discourage people from starting a new business, aren’t we? If I lose $10 million in Year 1 and then again in Year 2 and make $20 million in Year 3 then what should my proper tax bill be? On the $20 million profit? Or on my net $0 position?

OK, now think of a new business line being set up by an existing business. They make $50 million a year from their existing business. They invest in exactly the same business as that new one above. What’s their tax situation? They have, in Years 1 and 2, taxable profits of $40 million each, because their expenses in the new business are expenses. Then in Year 3 they’ve got $70 million in taxable profits.

We must allow the new business to carry losses forward to put them in the same tax position as the extant business competing with them. If we don’t then we’ve obviously slanted the playing field in favour of existing businesses. That would not be a good economic outcome.

So, we’ve established that it needs to be cumulative income which is taxed, not just the income in any one time period. So, therefore, if someone, or some company, makes a loss then that produces a tax credit which can be carried forward. And this again needs to be true whatever the legal structure of our business.

And we do this as well. For example, the story about Google and the purchase of Motorola Mobility. Motorola had been losing a lot of money. That meant that there were tax credits which could be carried forward. You’re not allowed to just buy the tax credits, there has to be at least some attempt to buy the business, not just the credit. But those credits did make up some part of the value of what Google was buying. And this is not unusual in takeovers of money losing businesses.

Or, as we might put it, C corporations do indeed gain tax credits from losses which can be carried forward and put against future profits. And we want to make sure that various forms of business structure are taxed in largely the same manner given roughly the same activities or situation. Not to do so privileges one form of business structure over another. Thus, if we have a C corporation which gains a tax credit for losses then so should other forms of business structure. Including, obviously, the tangle of partnerships and S corporations and all the rest which make up the business called “Donald Trump.”

So, yes, making a whacking great big loss may well have meant that there was a tax credit to put against future profits. But then that’s as it should be. Because we want to, we must, tax business on cumulative income.

At which point an interesting question. If you look at page 27 of this set of accounts from the New York Times Company you will see that in their fiscal year 2006 they lost around and about half a billion dollars. The question being, well, do you think they either cast back or carried forward whatever tax credit that would have given them? Perhaps to aid them in “avoiding” tax on earlier or later profits?

Myself I’d really be very surprised indeed if they didn’t but maybe that’s just because I’m a bit cynical? Inclined to see motes in eyes that are pointing to beams?



  1. In most cases these tax records are confidential and improper use or dissemination is a crime. Which raises the question out of the gate – how does anyone know if these are legit? You can’t access the official tax return to confirm. And whoever the source is that provided this to the NYT is breaking the law.

    Hey, I broke the law and violated my oath to give you these documents, but, hey you can totally trust me, these are legit!


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