03 Oct 2016

My Thoughts On Trump’s Tax Return

Politics, Shameless Self-Promotion, Trump 35 Comments

For those of you who follow me on Twitter, you know that this issue has absorbed a large portion of my sanity since Sunday. Hopefully this post will get it out of my system. An excerpt:

If you still feel like Trump is cheating, realize you too can take advantage of this “vast benefit.” I’ll show you how you can avoid paying all federal income tax next year. First, figure out your annual income; let’s say it’s $85,000. Then start a consulting business, and spend $85,000 buying printer paper and hiring a receptionist. During the course of the year, do absolutely nothing with this business, but you instruct your employee (who is getting paid a salary) to rip up the paper and throw it in the garbage, before she goes to the store to buy some more. Come tax time, when your accountant tells you that your new business suffered an $85,000 operating loss, use that to offset your $85,000 in other income. Your net income is $0 and so you owe nothing. Voila! Hey man, don’t hate the player, hate the game.

P.S. Tyler Cowen is the only blogger I’ve seen making (one of) my obvious points. The guys at Vox (not to mention the NYT) really did not have a good moment on this one.

35 Responses to “My Thoughts On Trump’s Tax Return”

  1. Aaron Sepulveda says:

    Do people really have a difficult time understanding bad business decisions and their consequences to tax returns? I would think critics would use Trump’s bad business decision against him instead of going in a tagent.

    • Bob Murphy says:

      Well many of them are using both, Aaron. I.e. (a) Trump is horrible businessman and (b) he screwed taxpayers over in order to get rich. That set me up for this popular tweet.

  2. Harold says:

    Trump does not publicly acknowledge that he failed. If he came out and said “I made a mistake, I lost a lot of money, I failed, I am sorry to all those who didn’t get paid” it would be fine. Anyone can make a mistake and it is great to come back having learned from one.

    He does not say that. He boasts that these failures were a great success for him. “He put up little of his own money, shifted personal debts to the casinos and collected millions of dollars in salary, bonuses and other payments. The burden of his failures fell on investors and others who had bet on his business acumen” (NY Times).

    He can boast about how he stiffs others to make himself millions. Or he can boast about building successful businesses as an example of how he will be good for the USA. He cannot have both.

    • Richie says:

      Your comment has nothing to do with Dr. Murphy’s post.

    • Andrew_FL says:

      Right, it’s totally fair game to attack the fact that he failed in a business venture.

      But that’s not what this is. They’re attacking him for not paying taxes.

      • Harold says:

        Richie, it is not dressing the main point, I agree, but is tangentially related.
        Andrew FL. I am not arguing that it is OK to attack the fact that he failed in business, although that is fair game. As I said, it is fine to fail, learn from your mistakes and move on to success. I am arguing that he refuses to see these as failures. He boasts that he did very well out of these failures. Now we see he lost close to a billion. That is not doing very well.

        Either he lied about doing well, or the losses were not genuine.

        If he lost a lot of money, why not say so? I speculate that it is because he cannot acknowledge that he failed at anything.

        • Andrew_FL says:

          But Democrats are not arguing “He can’t even acknowledge his failures!” They’re arguing that if you’re wealthy you should pay taxes even when you have zero net income.

          • Harold says:

            So maybe the democrats’ arguments are wrong. I am pointing out that this tax return is very embarrassing for him anyway.

            Why the democrats do not seize on the real issue I don’t know. Perhaps it is because they know that the one they are promoting will have traction, even if it is wrong. Just as most of Trumps offerings have traction, even though they are wrong.

            • Bob Murphy says:

              Look how fair I am, Harold. I tweeted this 2 days ago.

              • Harold says:

                Good call. Still not quite my point. I don’t think Trump is a bad businessman because some of his ventures failed. Lots, if not the majority, of very good business people have failed ventures in their pasts. My point is that he cannot face up to his failure. I think it is a character flaw that pervades all his actions. Take the late night twitter posts about beauty contestant.

                Richrd Branson says on hos blog
                “We’ve been running a series on epic entrepreneurs on virgin.com recently, featuring several of my heroes, such as Dame Anita Roddick and Thomas Edison. One of the threads running through all of them is the common theme of failure. This isn’t just limited to entrepreneurs. Every successful person has at least one thing in common: they’ve got things wrong over and over again before finding the right solution. As Edison himself said: “”I have not failed. I’ve just found 10000 ways that won’t work.”

                I don’t think Trump has this wisdom.

              • Bob Murphy says:

                Sure, I got you Harold. I agree Trump has boxed himself in with his schtick, so he kind of “had to” play the NYT story this way.

                So, it’s crazy on both sides. You’ve got Team Hillary claiming there are nefarious shenanigans, while Team Trump is saying he’s a genius for maneuvering the Byzantine code.

              • Harold says:

                And none of it seems to make bit of difference. Maybe Johnsonweld is the only answer?

            • Jan Masek says:

              It would be embarrassing if that was the only year he did business in. He clearly on net made billions even if in one year he lost almost a billion. I’m sure Warren Buffett has lost more in a year.

            • Tel says:

              Trump’s casino failure is completely common knowledge. There’s nothing new here, the details are written up in many places.

              Clinton is attempting to claim that Trump secretly made a profit while everyone else took the loss.


              It would appear that this tax return proves that Trump took losses along with the other investors.

            • Andrew_FL says:

              Harold-Oddly enough, I agree 100%

              Save a picture of this moment, it probably won’t happen again.

              • Harold says:

                Andrew_FL – one for the scrap book indeed!

    • Tel says:

      If you are trying to say that Trump’s loss was in some way a fake (only for tax purposes) then do you seriously think that the IRS are so stupid they couldn’t figure that out?

      After all these audits they still can’t find where Trump stashed the loot!

      We know you made a profit somewhere buddy, better come clean while you still got the chance, see?

  3. Andrew Keen says:

    Donald Trump’s fool proof plan to not pay income tax:
    Step 1: Make billions of dollars. (Unfortunately, you’ll have to pay a lot of income tax in this step.)
    Step 2: Lose nearly $1 billion.
    Step 3: Don’t pay income tax on your negative income! Genius!

    That Trump character sure is a wily swindler.

  4. Yancey Ward says:

    It took two days for Cowen to reach that point, however. Before that he was linking to the people who didn’t understand the issue at all. I suspect someone at George Mason, probably an accountant, explained it to him, which is kind of shocking to believe.

  5. Daniel Kuehn says:

    So this is fine but what gets me is carrying forward losses so far into the future. What’s the reason for that? I get why you’d want some carry forward (or refund past taxes) to smooth losses out but what’s the logic behind a full twenty years?

    Even that is obviously legal and normal but it still seems like something to legitimately get frustrated about (unless I’m missing something – which I probably am).

    • Bob Murphy says:

      Daniel before I answer you, can you explain why it makes sense to carry them forward 5 years but not 20?

    • Daniel Kuehn says:

      I’m not sure there is a magic number. My understanding is that the point is that while a calendar year may appropriately fit the volatility of most wage earners it may not for the companies. That’s fine – we don’t want a tax structure that privileges one type of income. But I’m not seeing how it takes twenty years to smooth that.

      My stab at an answer – that losses have a much longer tail than income so it takes that long to smooth. Is that true? And if it is true do we really have to embrace it as a necessity in the tax code for basic internal coherence of the code or not?

      Another stab – that it would really discourage startups not to allow this. Again though, that’s a deliberate subsidy for people that start companies which is not treating them the same as the average Joe (though maybe we’re OK with that).

      • Bob Murphy says:

        Daniel, I still don’t get what you mean. You don’t get how it could take 20 years to correctly calculate average income if Year 1 is -916 million and Years 2-20 are +50 million?

        Let me try it this way. You’re effectively capping the lowness of a particular income year, for purposes of reducing lifetime tax liability. OK, so would you also cap tax liability? So if someone has a really great year, and earns 20x his average income over previous 20 years, then he only gets taxed at an income of 7x his average?

        • Daniel Kuehn says:

          The taking twenty years to smooth (at about 50 million) was my first solution. I’m not sure why the flip side is supposed to be limiting liability. If you want to limit liability in good years then you shouldn’t also carry forward the bad years – you smooth it one way or the other right?

          So yes if it really takes twenty years to smooth this out then fine. If find that surprising but I’m not a finance guy – maybe it’s true.

          • Bob Murphy says:

            DK wrote:

            I’m not sure why the flip side is supposed to be limiting liability. If you want to limit liability in good years then you shouldn’t also carry forward the bad years – you smooth it one way or the other right?

            Just to clarify Daniel, I’m saying that if you don’t allow “smoothing” over lifetime, then that is effectively capping the impact of a really bad year, on lifetime tax liability.

            So, I’m saying if you’re going to do that, then by consistency you should also cap the impact of a really good year.

            But, as long as you allow indefinite carryforward, then you wouldn’t need to cap the tax on a really good year.

            • Daniel Kuehn says:

              Yep, Joe Cordes convinced me on facebook.

              So part of my concern was that you’d strategically carry forward to when you’re in a particularly high tax bracket but that doesn’t seem to be how it work

              • Bob Murphy says:

                Oh OK, that’s a valid concern (for a statist like yourself–ha ha). I thought of that when Yglesias or somebody was remarking on how flexible it was, that you could denote the years you wanted.

                And sorry if I misunderstood you. I thought you meant, “Even if the total loss hasn’t been absorbed by the 20th year out, at that point, give me a break, you’re done.” But if instead you meant, “You can’t take your loss from 2000 and then apply it solely to 2023,” then yeah that makes sense. So again, sorry if I’ve been totally misunderstanding your point.

              • Daniel Kuehn says:

                So as an empirical matter I wasn’t sure it really took 20 years to clear these things off the decks, but then I wondered if the reason they have it going that long is so people can have a wide range of choices of when to apply it.

                If it really does take that long then it is what it is – I’ve got no sense for the magnitudes of these operating losses relative to tax liability.

                Now as a statist I wouldn’t shed any tears if most people cleared off their net operating losses in 5 years so we’re just denying a few plutocrats a few more years of getting out of paying taxes by stopping at twenty. But that’s a very real-world kind of “I don’t care at that point” assessment – there’s nothing in principle wrong with extending it out indefinitely.

              • Daniel Kuehn says:

                So one thing I’m only vaguely clear on: I know you get to choose whether you want prior two year taxes refunded or whether you get to carry it forward – but is it true that you cannot strategically chose when in that 20 years to apply it? You have to use it the next year and keep using it until your NOLs are exhausted?

                That’s the impression I’m getting but I’m not 100% sure. If that’s the case it doesn’t seem like a big deal.

      • Silas Barta says:

        @@Daniel_Kuehn: Male modes make lower income over a larger number of years, while female models have much higher income, but concentrated in their early years. Thus, under progressive, one-year-cutoff taxation, women pay a higher effective tax rate.

        Should we not care about that sexism in the tax code?

    • Daniel Kuehn says:

      If it’s not clear from these comments I am not particularly concerned about this as a “loophole” or a sinister plot.

      I think his sinister plots can be found elsewhere.

      • Major.Freedom says:

        The answer is easy.

        Taxes, according to tax supporters, should be paid on gains. If taxes are paid on losses, or no gains, then people could be taxed literally to death.

        Dead people cannot pay future taxes.

        Not taxing people to death has the consequence of carrying forward losses indefinitely.

      • Daniel Kuehn says:

        MF – no dispute from me on not taxing losses!

        • Major.Freedom says:

          No worries, I was just saying that if we conclude that taxing losses is a No, then there really cannot be *any* cutoff time period, of say 5 years or 10 years or whatever, because taken as a whole, unless a person can recoup all of their losses, which could take many decades, any tax in any one hear will make the whole shebang a taxation against losses.

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