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A tempest in a teacup

October 4, 2016

Not that I have any interest in defending Donald Trump, but the kerfuffle about his tax returns is just more nonsense – maybe partisan nonsense. Here are some good posts about the topic that I came across this week. (My emphasis in the quotes below.)

TL;DR The U.S. tax code recognizes that there’s no reason a business can’t spend more money than it makes in a given year and it provides a way to average taxable income across years.

Megan McArdle at BloombergView:

Trump’s 1995 Return Shows Good Tax Policy at Work

The big news this weekend was the leak of Donald Trump’s 1995 tax returns to the New York Times. The returns showed that in that year, Trump claimed $916 million worth of business losses; those losses, said the Times, “could have allowed him to legally avoid paying any federal income taxes for up to 18 years.”

Liberal social media dissolved into an ecstatic puddle; conservative social media, at least the part that is supporting Trump, angrily denounced the Times for publishing this tripe.

A few sensible people tried to explain that while the story might have well show that Trump was a bad businessman, it didn’t really show any sort of interesting tax shenanigans. And since we had long known that Trump lost a bunch of money in Atlantic City, a story that has been amply and ably covered by folks like our own Tim O’Brien, it didn’t even really offer much news.

Why did people see scandalous tax avoidance in this case? At issue is the “net operating loss,” an accounting term that means basically what it sounds like: When you net out your expenses against the money you took in, it turns out that you lost a bunch of money. However, in tax law, this has a special meaning, because these NOLs can be offset against money earned in other years. You can use a “carryforward” to offset the losses against income made in future years (as many as 15 future years, under the federal tax law of 1995). You can also use a “carryback” to offset those losses against income you made in past years (three in 1995, which when added to the 15-year carryforward term, gives us the 18 years the Times refers to).

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. […]

Warren Meyer at Coyoteblog:

Yes, Let’s Make Entrepreneurship and Business Formation Even Harder

Well, it looks like the awesome team of Trump and Clinton may manage to take yet another shot at reducing entrepreneurship. It’s all a result of the report that the Donald had a nearly billion dollar tax loss decades ago, and that – gasp – this tax loss might have shielded his income from taxes for years. Hillary’s supporters are already demanding changes to the tax code and Trump, as usual, cannot muster an intelligent defense on even a moderately technical topic.

As someone who built a business over 10 years, I can’t think of anything that would do more to screw up the already languishing rate of new business formation than to somehow limit the deductability of business losses on future years’ taxes. […]

Dan Mitchell at International Liberty:

Trump, Tax Reform, and the Media-Generated Faux Controversy over “Net Operating Losses”

Because of his support for big government, I don’t like Donald Trump. Indeed, I have such disdain for him (as well as Hillary Clinton) that I’ve arranged to be out of the country when the election takes place.

The establishment media, by contrast, is excited about the election and many journalists are doing everything possible to aid the election of Hillary Clinton. In some cases, their bias leads to them to make silly pronouncements on public policy in hopes of undermining Trump. Which irks me since I’m then in the unwanted position of accidentally being on the same side as “The Donald.”

For instance, some of Trump’s private tax data was leaked to the New York Times, which breathlessly reported that he had a huge loss in 1995, and that he presumably used that “net operating loss” (NOL) to offset income in future years.

As I pointed out in this interview, Trump did nothing wrong based on the information we now have. Nothing morally wrong. Nothing legally wrong. Nothing economically wrong. […]

In other words, this is not a controversy. Or it shouldn’t be. […]

I’m ignoring the fact that Trump could have managed this whole kazish much better by releasing tax return info last summer – 5 months before the election rather than 5 weeks before.

And I won’t speculate about whether Trump may have gamed the system for his losses. I don’t know him or his businesses well enough to guess about that.

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