Much is being made today of Donald Trump’s being able to avoid paying federal income taxes in most years by showing losses. I have no idea whether Trump cheats or merely exploits the system. My guess is the latter. The rich are different from you and me. Keep in mind the old accountant’s advice: avoidance is legal; evasion is illegal. As in practically everything else under our system the real scandal is in what’s legal.
There are many, many ways of constructing a tax system that is impossible to avoid or nearly impossible to avoid. Among them are a flat tax without deductions and a value-added tax. You can even make a VAT progressive using a rebate system but that introduces complexities which will inevitably be gamed.
Do you know who benefits most from the incredibly complex system we have now? It’s not the rich. It’s legislators. Our complicated tax system gives legislators plenty to trade.
I am guessing a combination of cheating and avoidance. It has been documented before that they listed the values of property differently to either gain a loan or avoid taxes. Now, it is NYC. It would not surprise me if there is some way to legally manipulate numbers for the high rollers but if regular people did it you would go to jail. Probably all moot since in NYC (Philly too since I know that better) all of top real estate people had political connections to protect them. New Jersey might be even worse.
“Do you know who benefits most from the incredibly complex system we have now? It’s not the rich. It’s legislators. Our complicated tax system gives legislators plenty to trade.”
Not to trade but to sell. The wealthy pay off legislators to get the policy and regulations they want. Think of the legislators as being on the payroll of the wealthy. In theory they represent all of us. In reality, the wealthy come first. They used to just buy off all of the politicians. Now they are skipping that step and going directly into politics. Probably just a coincidence that they keep passing policies and regs from which they benefit.
Steve
I read it too. Looks to me like he’s losing money hand over fist.
“… they listed the values of property differently to either gain a loan or avoid taxes.”
I hate to break it to you, but so do you. The value on your real estate tax bill is almost certainly different than the FMV a bank appraiser would to base a loan on.
I don’t recall whether I’ve mentioned this lately or not but after my childhood in a gritty St. Louis neighborhood my family moved to a rather hoity-toity old money neighborhood in the suburbs and, yes, I experienced substantial culture shock. We lived there during my teen years.
When living there some of our neighbors and classmates’ families were extremely wealthy. By “extremely wealthy” I do not mean “had substantial salaries”. I mean really wealthy. One of our neighbors was a chap whom my dad had grown up with down on 14th and Clark. He had gone on to found what was to become one of the biggest finance companies in the country. He was extremely wealthy.
Like many such he was leveraged to the hilt. My dad used to say that he was one interest payment away from default. My impression is that is not uncommon among entrepeneurs.
I imagine the Trump organization was hit hard by the pandemic — since they are in the hospitality industry and many of it’s real estate holdings are in Manhattan and other urban centers.
But I don’t know if the tax returns really tell you much about the quality of Trump’s business investments. For that you need to see the cash flow. As an example of what I mean, if you looked at Amazon’s tax returns from 1996-2018 one would think the company was some kind of pyramid scheme. All the while Jeff Bezos laughed his way to being a modern Rockefeller.
And whatever we think of the likes of Ellison, Bezos, Musk and the like, they are using their wealth to try out a great many new things.
That’s something entrepreneurs are good at but corporations are too conservative and risk averse to be.
BTW – Its my understanding that these low tax payments in the recent years are due to tax loss carryforwards, tax loss carry forwards that became available due to Great Recession tax changes (extension of the period of applicability) and signed into law under a certain B Obama administration.
“Like many such he was leveraged to the hilt.”
If that is true, then he wasn’t really wealthy. He may have lived a wealthy lifestyle, but he was not wealthy, as that is the net number between enterprise value (for a business) or cash, and debt. That’s not a mere technicality.
“I imagine the Trump organization was hit hard by the pandemic — since they are in the hospitality industry and many of it’s real estate holdings are in Manhattan and other urban centers.
But I don’t know if the tax returns really tell you much about the quality of Trump’s business investments. For that you need to see the cash flow.”
Absolutely. And recall, it appears the low taxes were generated by the tax loss carryforwards. That would speak to events many years ago, not today.
I am a tax accountant and I see people with losses on real estate investments every year. The tax code was very favorable to real estate long before Trump came to power. I don’t deal with people of Trump’s income level so I can’t say how common the other items in the story are.
I think the spending in his foundation were worse than what is alleged on his tax returns.
Mercer –
I’m sure you see losses if for no other reason than tax depreciation. And that’s how it would be reported in the press. But they never talk about real market value and depreciation recapture upon sale…………
“hate to break it to you, but so do you. The value on your real estate tax bill is almost certainly different than the FMV a bank appraiser would to base a loan on.”
Sure, but the difference were huge. Bet I cant get away with that. If you are politically connected and get the “right” appraisers I bet you can.
Query- If you have such huge losses that you are never paying taxes, how are you getting rich? You must have had really massive losses or you arent making tons of money to offset the losses. (Not an accountant.) Wouldnt surprise me if the answer is that we have special rules for the wealthy so that they come out ahead no matter what they do.
Steve
Nice try, steve. Epic fail. First, its the principle, not the magnitude. Second, you do it as well, if you have ever had a mortgage. You crook. And you got away with it. Its structural. You are engaged in exactly the same thing you decided to ignorantly criticize. But in your infantile zeal to criticize, and your pathetic understanding of finance, you failed to comprehend what’s really going on. (and as for favorable appraisals, I would suggest to you your home appraisal is farther from reality than Trumps real estate holdings; that said, this is not a tutorial on appraisal, but they are all crap, best used as toilet paper. Hear me: The value of a specialized, illiquid asset is what a willing buyer and seller decide it is, after all diligence and negotiation; nothing else matters. )
Your last paragraph is just dumb. I’ve now seen further articles supporting the tax loss carryforwards. Specialized, illiquid, assets are a roller coaster ride. Their value ebbs and flows. Lord don’t I know that. It only ends upon liquidation. You do understand tax basis and depreciation recapture, in addition to fluctuating asset vales, right? Right? Right???
I’m not here to defend Trumps net worth. It is what it is. But I am here to point out that the quality of public commentary on this is kindergarten level, including yours.
“If you have such huge losses that you are never paying taxes, how are you getting rich?”
Its beyond a comment to be able to teach the basics of accounting and business.
My suggestion was hinted above; study the “10-K” of Amazon from 1996-2016 (or for a more controversial one, Tesla). Amazon reported a net negative income from 1996-2008; and reported negative income from 2012-2014. Yet Amazon was actually becoming wealthier and wealthier the whole time. If one can figure out how Amazon did this feat, then they can understand how to answer the question posted.
I am not implying the Trump Organization is Amazon. I am stating tax returns are not enough to understand the financial health of the company.
Reality doesn’t matter. All that matters is that Biden tonight will be chuckling and grinning on cue from his earpiece as he points at Orange Man Bad and says, ‘see, he doesn’t pay his taxes!’ as Wallace keeps cutting Trump off as he tries to explain how he did in fact actually pay significant taxes. I would imagine the POTUS might come back with examples of how Biden games the system, at which time the networks will cut to talking head commentary explaining how OMB doesn’t pay his taxes and he may be a tax cheat etc. etc. etc. Control the message, control the narrative.
What I notice here is that it seems to be OK that the wealthy dont pay taxes. If we just understood the rules better it would make sense. What I am taking from this is that the rules have been made so that the tax system explicitly benefits the wealthy in ways that it does not benefit those who are not. Amazon I get. Besides, with Amazon we have a publicly traded company and lots of people assessing its value. But note that Amazon now has to pay taxes sometimes. (Note the Trump quote in the link where you have Trump complaining about Amazon not paying any taxes.) Individual real estate guy? It’s rigged in their favor. I thought this was something I already knew but nice to have you all confirm it. As the title of this post notes, we clearly have a different tax system for the wealthy. It is even worse now that they dont audit rich people much anymore, just the really poor people.
” You are engaged in exactly the same thing you decided to ignorantly criticize.
Nope. Unlike Trump I dont have the political connections to have the appraisals I want.
” Hear me: The value of a specialized, illiquid asset is what a willing buyer and seller decide it is, after all diligence and negotiation; nothing else matters. )”
Duh! But when you are not selling that illiquid asset then value is determined some other way. In NYC political connections go a long way towards that determination.
https://www.cnbc.com/2020/02/04/amazon-had-to-pay-federal-income-taxes-for-the-first-time-since-2016.html
Steve
You are absolutely correct, Curious. And you understand the bottom line: cash flow.
“Nope. Unlike Trump I dont have the political connections to have the appraisals I want.”
Yes you are, steve. You just don’t want to admit it.
And yoDuh! But when you are not selling that illiquid asset then value is determined some other way. In NYC political connections go a long way towards that determination.u know it.
That’s an assertion. Not a fact. More importantly, ultimately they get sold.
You are confusing your partisan views and ranting with the realities of the tax code, bought and paid for by your precious government. The tax code stinks. But you get the same benefits as rich people. You just have fewer zeroes. And that includes your home appraisal for taxes vs loan to value. And your home mortgage deduction.
If you really were interested in equity you would support a total destruction and simplification of the tax code, decidedly not what your party affiliation wants. Start with a flat tax.