What Trump has in Common with a Subsistence Farmer

Word is that Donald Trump lost $916 million in 1995. People speculate he has carried over this loss since then, potentially paying absolutely nothing in taxes the subsequent 17 years.

This is not necessarily tax evasion. Or even necessarily immoral.

By nature of where I live, I have friends who are farmers who have virtually no cash earnings and no savings. They pay almost nothing in taxes. I don’t think anyone has that much of a problem with that. Many would agree that people with no earnings ought to pay no taxes.

But these friends are workers. The capitalist equivalent are businesses and individuals who have assets that don’t earn anything in aggregate. Think, for example, of most airlines until a few years ago.

Should an airline that shuffles around millions of people each year yet earns $0 pay taxes? I would argue that they owe no income tax. They ought to pay payroll taxes and sales taxes and airport fees and fuel taxes and state taxes, but I’m OK with their income tax bill being $0 as long as they in fact haven’t actually earned anything.

Let’s pretend that our airline does this for two years:

year 1 earnings: $0
year 2 earnings: $0

Presumably, if we’re still OK with such a company not paying income taxes in one year, nothing changes when we’re talking about two years or even 18. This company ought to pay all its other taxes, but it is legally and morally OK to not pay income taxes as long as it has no income.

But really, this sort of result is pretty rare. You’re more likely to see something like this:

year 1 earnings: -$1,000,000 (a loss)
year 2 earnings: $1,000,000

What should this company pay in taxes? A lot of people would argue that they owe taxes in year 2—the year in which it had positive earnings. I, and the tax system as I understand it, disagree. The company’s net earnings are $0 over the two years. There is little reason for this company to pay an income tax while the airline above does not. What ought to matter is the total amount the company earns, not the year in which the amounts are earned.

There are important limits to this, but the tax system is intentionally designed around this basic intuition. If you’ve ever realized a loss of more than $3000 in the stock market, you’ve probably had the opportunity to similarly “carry over” your losses to the next year to offset your income in the next year. Or maybe you refused on moral grounds and judge those who accept what TurboTax does for them automatically a tax cheat.

Other tax-minimizing behaviors attributed to Trump seem similarly innocuous:

[O]ne thing working in Trump’s favor is that he sets up most of his business enterprises as limited liability corporations and partnerships.

As a result, he would have been allowed to apply a loss from any business he actively managed to offset the taxable profits he earned from his other businesses.

This is exactly how it should be. You should pay income taxes on your income. If your income is spread across three investments, you need to add the income from each investment and pay taxes on the grand total. This is not a dastardly scheme. It’s literally the simplest, most intuitive way to pay your taxes. It’s the same thing done by Berkshire Hathaway that people loudly commend for paying its share of taxes, and it’s followed by me when I add up the income from my army of interest-bearing checking accounts. And it’s what every tax filing program out there will do for you without asking.

In addition, as a real estate magnate, Trump has a slew of other completely legal tax breaks available to him.

Among them, he is allowed to deduct the interest on loans used to finance the purchase and development of properties. He can deduct the operating expenses and maintenance costs of his properties.

Sorry. This isn’t a real-estate magnate thing. If you sell $100,000 in donuts, you get to deduct all the costs associated with making, distributing, marketing, and financing your donuts. Actually, deduct everything that is an expense to your donut-making operation. If that’s $90,000, then you only have to pay income taxes on the $10,000 left over. This isn’t because of the donut lobby. It’s because that’s what income is; it’s what’s left over after your expenses.

Donald Trump seems to be an awful person. He shouldn’t be president. But there is nothing I’ve yet seen in the media about his taxes that seems more sophisticated or troubling than what you’d find in any Robert Kiyosaki book.

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Vikram Bath is the pseudonym of a former business school professor living in the United States with his wife, daughter, and dog. (Dog pictured.) His current interests include amateur philosophy of science, business, and economics. Tweet at him at @vikrambath1. ...more →

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58 thoughts on “What Trump has in Common with a Subsistence Farmer

    • If trump released his taxes tomorrow and they confirmed that he legally used this tax avoidance measure, then liberals would shut up? Hardly, they would still condem him.


      • Well he’d still have managed to lose a colossal amount of money and be a cretin in various other ways, but I’ll agree that if he released his returns and this turns out to be on the level and there’s nothing else hidden in there, we liberals ought to let up on the issue. I put the odds of this being the case at slim and none, and slim left town a week ago.


  1. I’m trying to imagine a single Clinton voter who would change their vote from Clinton to Trump based upon any possible tax return of Trump’s.

    “I was going to vote for Hillary but when I saw Trump’s tax returns for 2010-2015, I realized the following things…”

    I’m failing.
    I’m failing to come up with a possible tax return that might convert someone.
    I’m failing to come up with a person who would have their minds changed by either the contents of the tax return I’m failing to come up with *OR* someone who has the tax return being released as the main thing keeping them from trusting Trump.

    Same for people who are likely to stay home unless Trump releases his taxes.

    Is there anyone out there who *CAN* imagine this person?
    If you are someone who can imagine this person, can you describe him or her to me?


    • The person to imagine is the independent voter who’s leaning Clinton because she doesn’t yet trust Trump. It’s not decisive, but it helps.

      And likely, that person was more likely to be convinced two months ago than today. That’s the way it is with transparency.

      But transparency still is a real thing to people who aren’t partisan. It’s not a thing made up by the media no one else cares about.


      • I can get to how this is something that would make someone already inclined to vote Clinton to say “yeah, him *NOT* doing that is yet another reason that I’m voting Clinton.”

        I’ve got no problem seeing that.

        I’ve got a problem seeing the person who is undecided and/or undecided/leaning Clinton to say “oh, good! He released his tax returns. I guess he has nothing to hide. I can lean Trump now.”


    • Jay,
      Romney’s tax returns, that in all probability recorded him hiding money in overseas tax shelters, would have shifted votes.

      Trump? Anyone who cared about tax returns also cared about his sex scandals.

      What would shift this election? Trump gets a few interns to start talking about the First Husband-to-be. Because, then, my dear, it’s game on. “Who’s the bigger mysogynistic bastard — the one with his … down a young girl’s throat, or the one who can’t keep his bloody mouth shut?”

      Wikileaks is trying, gotta give them credit, but their October Surprise just got Trumped by Hillary’s team.


      • Your clinton hatred is bordering on manic lately(forever), and I just want you to know its going to be ok. Real hillary is far less scary than the mad bomber crazy cackling bitch you have in your head.

        Madame president is going to be fine. Ive watched the Clinton circus my whole life, seen the whole show.
        She’s very much going to go where the party does. Move the party if you want her to be less hawkish.

        But watching her displaying actual policy knowledge and proposals with spelled out math and trouncing cheeto jesus?
        So priceless the only thing could top would be B. Barry BAMZ doing it. I need to smoke after the debates, I’ve enjoyed it so much.


        • ” Ive watched the Clinton circus my whole life, seen the whole show.”
          Then you haven’t been watching terribly closely these last few weeks.

          I’ll repeat, in case you haven’t read — I do know someone who works for Clinton — who has bet against her and had her pay up publically (I can share the news article if you want). He says that Clinton has gone off the deepend and… isn’t getting better in a hurry.

          You… enjoyed the debates? Holy… Obama’s debates were fun, because trolling. Actual intelligent planning went into flummoxing McCain enough that he stuck his tongue out. This time round? Meh. Meh. Meh.

          I mean, I know someone who works politics sometimes (aforementioned guy “who works for Clinton”) — and he didn’t even bother watching.


          • In the fantasy world where thats all true, sure ms. Clinton gonna bring about the apocalypse.

            In reality shes slightly more bomby than obama. Which is a drawback, but shes an effective supervillan, so I’m looking forward to next 8 years.


  2. As I posted elsewhere, what Trump ought to be saying is “of course I did this! Anyone could do this! You could do this!”


  3. I’m perfectly OK with counting business losses against future business income–it would be crazy for it to be any other way. But I’m trying to figure out if there’s any way for all of these things to be true at once:

    1) Trump is a great business man.
    2) Trump personally lost $916 million–not the total of all of his investment partners but his own share of the loss.
    3) The scale of his personal investment was large enough that he could lose $916 million in 1995 but small enough that over the next 17 years, he never ended up back in the black.
    4) Trump is fabulously, fabulously wealthy and has way more money now than he did in the early 90s.

    I can imagine stores that make some of these things true, but I can’t make them all fit together sensibly. I also can’t imagine any more of his financial details coming out would make him look any better than he does right now. There’s basically zero chance that he can be pressured into showing us more. It would certainly not benefit him.


    • tf,
      Trump isn’t fabulously wealthy, and has tried to sue the press for (accurately) calling him a millionaire instead of a billionaire.
      He does TONS of stuff on the company account (like his “corporate jet”). It’s not his money, really.

      He’s not a great businessman. He’s not even a great swindler (see the people doing Solar Fucking Roadways. Now that’s a swindle. Even has a bagholder).


      • That’s roughly how I’ve sized him up. He seems to be nothing more than a brazen con man who has parlayed his inheritance and his father’s influence into an opulent lifestyle and sustained that lifestyle by licensing the image of it to a string of failed companies.

        I don’t see any indication of great business acumen or even a realistic assessment of his own place in the world. His run for office appears to be a vanity project at best, a financial con on the donors at worst, and in the middle, just a cynical trick for pumping up a declining image–the only thing he has to sell.

        My big question is whether after all is said and done, he makes more money because he’s more famous among easily conned average Joes or less money because he has burned his bridges to the types of financial heavy hitters you need to get big capital projects off the ground. Rumors of him starting a media company don’t seem particularly crazy. The iron is hot–he’ll have the disaffected crazies clamoring for the echoiest echo chamber available and a lot of name recognition among them. He could probably do to Fox News what Fox News did to actual news.


        • I suspect he would have made more money had he lost to someone in the primaries but made it a little way.

          I don’t see how this is good for his bottom line. I sure as hell wouldn’t stay at (or schedule an event at) a Trump property, and I’m the kind of business traveler that I’m sure he wants.


  4. IIRC, a corporation can go for a long time without showing a profit. But if I act as a small custom software firm, I have to show a profit in three of each five years or the IRS classes it as a hobby and I lose the ability to deduct depreciation and other business expenses. (That would be US tax code. Don’t know how other countries might do things.)


  5. I think I agree with your basic point, that tax-loss carryforward is a reasonable thing, and it’s reasonable to take advantage of it.

    Here’s the thing – I do not remotely believe that Donald Trump personally recognized losses of $916 million in one year. I think he gamed the system in a way that the system does not want to be gamed, but cannot be fully programmed to reject.

    In online gaming, we call this an exploit.

    Here’s the most likely scenario – he personally guaranteed a bunch of junk bonds to finance his casinos. He couldn’t make enough revenue to cover the interest on those bonds, so he defaulted, and sent the corporate entities to bankruptcy court. The creditors get real clear that even though he guaranteed them that money, he doesn’t have it, and they won’t get it. They are probably going to get only $.01 on the dollar.

    If this is what actually happens, the rest of the loans are forgiven, and show up as income on his personal taxes, and this wipes out most of the loss, and he gets a loss of $9.16 million – still big, but a lot, lot smaller. [Vik: moved decimal point per Jay’s request]

    So, now Trump comes along and offers them a deal – He’ll give them $.011 on the dollar if they allow him to buy the debt with an offshore corp. The creditors are happy to take a little more than they thought they would get, so they say yes. The corp holds the debt and doesn’t forgive it, so that doesn’t show up as forgiveness on his taxes. But since DRT controls the company, (The most likely corp is an entity called DRT Enterprises, which was formed in 1995 offshore), the company never pursues collection. In the tax world this is known as “effective debt forgiveness”, and they don’t like it not being taxed, but they have issues with making that stick. An exploit.

    There are other scenarios where he used an unintended loophole in law concerning realtors – a loophole that Hillary Clinton voted to close while she was in the Senate.

    I have no problem using tax law to my advantage, when I am doing the thing the tax law seems intended to encourage. For instance, I buy tax-free municipal bonds. The reason tax law lets municipalities issue these bonds is to encourage people like me to buy them. So that’s not an issue.

    And loss carry-forward is the same way. I think there was something darker going on here.

    Furthermore, I feel fine speculating about what he did, since he could always shut me up and make me look stupid by releasing his tax returns, which every candidate in the last 40 years has done. I sort of agree that it’s too late in the game to do that now, but that’s his problem, not mine.


    • Oops, I slipped a decimal point. I wrote

      If this is what actually happens, the rest of the loans are forgiven, and show up as income on his personal taxes, and this wipes out most of the loss, and he gets a loss of $91.6 million – still big, but a lot, lot smaller.

      That should have been $9.16 million. Painful, but not remotely enough to wipe out earnings for two decades.


    • I’m going to point out again: There is no way on Earth Trump lost a billion dollars in 1995.

      It didn’t happen. He did not personally lose one billion dollars in a single year.

      Whether he used a loophole, whether he did some fun stuff with debt and off-shore companies, whatever — that one billion he claimed as a personal loss was not, in fact, a personal loss. Legal or not, he made that a “personal loss” through some form of chicanery. That billion dollar loss was either not a billion dollars or it was a billion bucks of someone else’s money.

      A billion dollar deduction in 1995 was “big corporation level”, not “individual”.


    • I’m glad someone else explained it. I was about to explain it much poorer.

      Donald Trump did not lose a billion dollars *of his own money* in a year.

      Donald Trump probably lost a billion dollars of *mostly other people’s money* in a year. (Possibly more than a year.) and yet thanks to tax laws, could write that off on *his* income taxes.


  6. I wish were were in a year in which a dry academic discussion of the passive loss carry forward was a thing.

    What has people riled up is not the concept of the passive loss, but the way it is clear that the tax code is a vehicle for special favors for the powerful, where the losses are socialized and the profits privatized.


  7. Chip has it right. I think you are correct in a letter of the law kind of way but not spirit of the law.

    As far as I know, most sustenance farmers do not have the lavish lifestyle of Donald Trump. They are not buying Brioni suits for thousands of dollars. They are not going around bragging about being ultra-rich business geniuses. This is what makes Trump’s not paying taxes so shocking to many.


  8. For this to add up, it would require the following…

    Trump had a net worth of $X prior to 1994.
    After 1994, his net worth was $X-$960M.
    Until he pays federal income tax, his net worth would have to be below $X. Otherwise, he’d have earned more than he lost, giving him positive income and requiring him paying income tax.



  9. This is missing the forest for the trees. It’s a commonly held view that people who make it big – especially those who inherited much of their wealth – should help those less fortunate. This isn’t a law but it is an expectation that speaks to a person’s moral character. Trump could have done that through charitable giving, but he has presented *no* such evidence and his Foundation (which is not a charity) is engaged in fraudulent activity. Trump could have done that by running an equitable business – rewarding his employees and doing right by his clients; but there is also abundant evidence that he stiffs people and throws around threats of malicious litigation. At the very least, Trump could have done it by paying a reasonable amount of his income in taxes; but this return (and his subsequent statements) suggests that he’s not doing that either. The point is not that this leak is – in and of itself – unseemly activity. The point is that it removes the last unknown through which he could demonstrate some kind of civic sacrifice.


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