Trump stirs tax reform debate
By Peter Schroeder - 10/04/16 06:00 AM EDT
News about Donald Trump’s tax bills is sparking new hope that a political tax debate might lead to a push for reform on Capitol Hill.
Both parties agree the code, which has not been significantly changed in 30 years, is in need of an overhaul. Yet no legislation has gained traction.
Some argue there is a chance — particularly if public anger grows that the code is benefitting the wealthy at the expense of the poor.
“What might compel [action], especially in this era of populism, is this broader sense of how much some folks are getting away with, lawfully or not,” said Sage Eastman, a lobbyist at Mehlman Castagnetti and former top aide to retired House Ways and Means Committee Chairman Dave Camp (R-Mich.)
Democratic presidential nominee Hillary Clinton seems inclined to fan public anger at Trump.
She devoted a significant chunk of her remarks at an Ohio rally to tearing into the GOP nominee, calling him a disastrous businessman who unfairly minimized his tax bill.
Over the weekend, The New York Times reported that in 1995, Trump reported a $915 million net operating loss on his tax return, a loss that theoretically could have allowed him to deduct future tax earnings for the next 18 years.
Trump, who has run a decidedly populist campaign, admitted Monday he was a “big beneficiary” of existing tax laws but vowed to overhaul the code if he is elected.
But he also called the documents obtained by the Times an “alleged tax filing.”
“Fixing our broken tax code is one of the main reasons I'm running for president,” he said at a Colorado rally.
At the center of the controversy is a provision of the tax code that permits Trump to report a loss on his taxes and then apply that loss to other tax years as a way to lower the income tax he owes.
Reporting such a “net operating loss” is a common tactic for “pass through” business owners that report their business’s profits and losses on their individual tax returns.
In the year Trump posted his loss, another 505,302 people posted their own losses on their taxes, totaling $49.3 billion, according to Alan Cole, an economist at the right-leaning Tax Foundation. However, most of those were a fraction of Trump’s, averaging about $100,000.
Tax experts argue that there is good reason for letting people use losses the way Trump did. For one, it encourages businesses, particularly in the start-up phase where profits can be hard to come by.
Furthermore, letting people apply losses to other tax years helps businesses deal with the arbitrary Dec. 31 cut-off date for the tax year.
Robert Kovacev, a tax partner at Steptoe & Johnson LLP, used an example of two businesses: one made $1 million in June, and lost $1 million in July. The other had the exact same activity, but between December and January. Without the ability to carry forward or back losses, those two companies would face different tax bills.
“It’s very commonplace,” he said. “All the net operating loss rules do is say that a company isn’t punished for having its losses in one year and its profit in another.”
Even with Trump’s returns now serving as major political fodder, some are skeptical Congress would rush to change the code to prevent that type of activity.
There are other tax provisions that Trump, as a real estate developer, could have taken advantage of, but if he did or how is unknown since the nominee has refused to release his tax returns.
“The rules are kind of rigged so real estate is more likely to produce losses than a lot of other lines of business,” said Len Burman, director of the Tax Policy Center.
For example, a realtor can unload a property at a profit without having to pay taxes on those gains, so long as the property is exchanged for another property in a “like-kind exchange.”
Calls for tax reform have emerged repeatedly in the last decade, and a bettor would have grown wealthier hedging against Congress taking action.
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As a result, many Washington veterans are skeptical that the Trump news will lead to much of anything.
“If it’s just another round of ‘Donald Trump is a great scoundrel,’ then I don’t think it moves the tax reform debate forward,” said Douglas Holtz-Eakin, head of the conservative American Action Forum.
At the same time, Eastman noted, “If you’re a reformer, you want people talking taxes in the closing month of the campaign.”
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