As I mentioned in a previous post, I emailed about 45 of my academic accounting colleagues and asked what they thought about the Trump tax return revelations by the New York Times. These are extremely smart people who know a lot about tax, and, as far as I have been able to gather, are incredibly even-minded and non-partisan about the whole thing.
Here is the distillation of the comments into 9 different themes:
Thanks to Allison Koester, Bridget Stomberg, and Daphne Armstrong, who all commented, and specifically said I could acknowledge them. Others preferred to be anonymous.
1. Some praise for the article:
- Overall, I thought the article did a nice job of making these pretty technical issues accessible to a general audience. The term “tax evasion” was never used; simply the more benign term “tax avoidance.” I appreciated that.
- It is tough to balance (a) staying high-level so people can follow the discussion and (b) not being so general that the important details that illustrate a tax transaction are glossed over (at best) or mischaracterized (at worst). Overall, I think the article struck a nice balance on these two factors.
2. But, some were upset at the New York Times almost certainly breaking the law to get the returns:
- Wish the President had voluntarily released the returns, but have mixed feelings about the press releasing this information without taxpayer consent.
- …I have a strong distaste for violations of the fiduciary duty to protect private information: meaning I wish the report had included <nothing>.
3. Some people didn’t think they learned much, at least about some specific things:
- I didn’t really learn anything new. We’ve known that the US tax code provides ways for high net worth individuals to pay very little in income tax, especially for those engaged in real estate activities. Knowing that the exact magnitude of “very little” is $750 doesn’t do much for me. Despite my strong disdain for Trump, I don’t think this reveals anything about his character. Just like you or I, Trump is doing everything he can to avoid taxes, and that is not illegal.
- I didn’t learn much. I’ve done tax returns for families of business entities before, and experienced the process of minimizing tax burden among those entities. I am interested in the tools that he used to generate tax losses in his business, because many businesses use strategies to defer tax payments by reducing current taxable income at the expense of future income. These strategies generate more capital to invest, and if business growth is sustainable, tax deferral can result in a business with high economic growth and sustained losses for tax reporting.
- Frankly, it is not terribly surprising to me that he paid so little in federal income taxes, given the nature of his businesses (as I understand them). There are a number of legitimate and uncontroversial tax planning angles one could employ in the real estate business that generate massive tax deductions or defer gain recognition. That the burdens are very low, especially amid significant reported losses, and the fact that he donates his salary to charity suggest to me that the reports themselves may be credible.
- I have been asked by a few reporters if I was surprised to learn that Trump paid so little in federal income tax. I’m not surprised in general; he has been telling the public for years that not paying taxes makes him smart.
4. Many thought more information would have been nice:
- Would like to see the actual tax returns
- I think the information was muddled. I wish they could have provided screenshots of portions of the return or walked through the returns with a little more detail.
- I was honestly expecting the report to include some line items from Trump’s Form 1040. The schedules would’ve been nice, but I wasn’t expecting those. It would’ve been really cool to see how much of his income is being offset through the various deduction buckets (e.g. 20% offset through capital losses, 30% offset through depreciation from buildings, 15% NOL carryforwards, etc.)
- I wish the article had included a breakdown of taxable revenues and deductions, by type and by year, so that we could more clearly trace the NOL creations and utilizations throughout the years. I guess that is the accountant in me; I want to see the numbers roll over year by year so I can better understand what is happening when.
- What I really wish to see is his foreign business dealings, which will include his bank transactions and offshore companies. This is something to look forward from the investigation by the Southern District of New York.
- it would be helpful to know more about how the NOLs were specifically used (e.g., did it coincide with arrangements consistent with shifting of losses or income across jurisdictions or did they coincide with years that had M&A?). Further, it would be helpful to know what types of credits were claimed. Certain credits are tied to greater discretion and risk (e.g., R&D tax credits) while others are considered more benign (e.g., credit for employer provided childcare services). Other information that could be helpful would be the % of mixed use property claimed to be personal vs. business-use and all the types of property claimed to have mixed use. This could be helpful for assessing whether there is a common theme to the mixed use property that is or is not relevant for his primary area of business (related to real estate).
5. Losses were the big story, and surprising to some:
- The persistence of Trump’s business losses even under otherwise good economic conditions is striking. Coupled with the Times’ earlier reporting of portions of his tax returns from the 80s/90s, his ability to zero out his tax liability virtually indefinitely is even more extensive than I had imagined.
- The most interesting thing to me is that it appears Trump is leveraging the NOL rules to reduce his taxes – which is the same thing Amazon presumably has done for years and for which Trump has assailed them. I think it’s hypocritical from him to try to publicly shame Amazon for what he does himself as an example of “brilliantly” using the tax law to his advantage.
- It may be difficult to separate from my general view of Trump, but it makes me question my instinctive support for loss carryforwards and carrybacks, and I expect that much of the public that already do not understand or support these will feel even more strongly about these apparent inequities in the treatment of labor vs. business income.
- It’s clear from the article that there are NOLs and tax credits involved and likely mixed use property. However, many uses of NOLs and tax credits are benign forms of tax subsidy. So from the mention of the existence of these features alone it is hard to conclude how specifically the use of losses were “aggressively employed.” However, additional information could be discussed to better help assess the degree of aggressiveness vs. benign nature of the tax planning involved.
- I was a bit surprised to see the magnitude was as low as the article reported, but a $700 million loss that gets carried over year after year certainly does help one not pay federal income taxes for a long time.
6. Some were surprised at the conflicts of interest
- they highlight the potential conflicts of interest Trump faces as a sitting President who personally owes hundreds of millions of dollars to…someone?
- Finally, I had no idea of the scale of potential tax obligations involved in Trump’s audit. Given Trump’s evident influence over Mnuchin and other agency heads, and his willingness to exercise this influence over seemingly small matters, it is virtually a foregone conclusion that he will have been trying to see his audit wrapped up in his favor (and hence, I suspect, the leak).
7. The article reminded us that Trump is not that great at business:
- He is not the most able business man to make profits but he knows how to create business celebrity status. In other words, his real estate (tangible) business creates an aura of prestige, based on which he can garner (intangible) income from licensing deals. It seems that NOL carry forwards have helped a lot in lowering his taxes. If that is the case, immoral, maybe, but does not rise to illegal.
- It is a very foggy window into the complex operations of a persuasive, but not very successful businessman.
- they allow us to get a better sense of just how consistently Trump makes bad business decisions, which seem driven largely by his obsession with image (e.g., to be seen as an owner of golf courses, resorts, and luxury hotels).
8. Some specific complaints about specific claims in the article, or, the way things were worded:
- The article notes “Mr. Trump wrote off some $26 million in unexplained “consulting fees” as a business expense.” The fees are explained; they are consulting fees. If they are ordinary and necessary business expenses, they are deductible. The IRS doesn’t ask a taxpayer to line-item each individual fee to reach $26M in total. Just because the tax return (or whatever source document the journalists had access to) doesn’t provide details doesn’t mean the deduction is unexplained/questionable. And I think it is important to remember that if everything is done properly, then his $26M deduction is someone else’s $26M of taxable income.
- There are also timeline issues that I hope the newspaper goes into in more detail in future articles. For example, the Trump kids spending summers at the Seven Springs, NY estate (which would have been several decades ago) and Trump classifying it as an investment property in 2014 and deducting the property taxes because it is now an investment property are not inconsistent activities. The tax code permits a residence to later be turned into an investment property.
9. While several of the comments above suggest the commenters saw nothing fraudulent or illegal, one commenter arrived at exactly the opposite conclusion:
- Based on the facts as reported, there is very clear fraud (the ordinary loss claim on the “abandoned” casino investment, in which Trump got a 5% interest in the reorganized company) and near-fraud (consulting fees to Ivanka that skirt the gift tax rules). These issues need to be addressed aggressively by the IRS — and the public must learn more — in order to maintain any sense of confidence in the US tax system.
10. And finally, some sympathy for the situation in general:
- I think the tough thing that is unique to Trump’s taxes (relative to many other politicians, or even the average person who doesn’t run his or her own business) is that his tax returns are more like a business tax return than a personal tax return. The majority of people’s tax returns are fairly straighforward because the returns just reflect what that individual does (goes to a job, has a few investments, pays a mortgage, etc.). Trump’s tax returns reflect the operating activity (for tax purposes) of more than 500 LLCs conducting operations around the world. It’s a complicated operation, and the tax code is complicated, so his returns are also complicated.
- I did not vote for Trump, but what concerns me is the fact that the tax planning may have been uncontroversial from a legal standpoint, but it has turned into a personal political point. Individuals are certainly entitled to pay more tax than they owe, should they choose to, but being criticized for paying the correct amount of tax (assuming it is) seems to be politicizing a topic against a candidate, when it really should be a discussion about the broader laws of the republic, which are designed (albeit imperfectly) to promote certain forms of investment.
And, finally, one of my favorite comments: “The article is long.” I agree. The original article is about 9,500 words, about 9 times longer than frequently shared news stories in the New York Times.
