Taxing Trump

There are a lot of inconsistencies in the American tax code.  Anyone that pays taxes knows it.  Some are put there because the writers of the tax code want to be “fair”.  What I have found in my life is fairness for you might not look like fairness for me.  Fairness is arbitrary.  It can change over time.

Is it “fair” for corporate profits to be taxed three times?  Once when they make them.  One more time when they pay a dividend on them to shareholders.  One more time when an individual reports their income and pay tax on the dividend they receive.

There is a big dustup right now over Trump’s taxes.  He says he won’t release them because he’s in the middle of an IRS audit.  My guess is Trump is perpetually in audit.  If he self identifies as a conservative, he might be permanently in audit given how the IRS targets political opponents!

Trump makes his money in real estate.  Real estate taxes are full of loopholes.  When Trump releases the amount of money he paid in taxes and his income there is no doubt in my mind that his opponents will blow it out of proportion.

However, most of them don’t have a clue as to how the American tax system works.

In real estate, did you know that if you develop a building the goal is only to have it 60% leased?  Normal people would think that seems stupid.  Wouldn’t you want it 100% leased?  The answer is no.  At 60% leased, you can support the debt and ongoing cost of operations, and take the 40% as a loss against profits.

Did you know if you lose money, you can carry forward or carry back the loss against income in the future or past?  Suppose I lost $1M in a year.  In succeeding years I made money, but not a ton of money.  I can amortize that loss against future income to decrease my tax liability.  No doubt, Trump’s taxes are full of carry forwards and carry backs because not all of his projects or entrepreneurial endeavors are winners.

Lobbyists have gerrymandered the tax code.  Politicians have masked the gerrymandering because it’s “good”.  Look at all the cranes in Chicago’s River North building new apartment buildings.  I am thinking both Democrats and Republicans like it.  It’s not just 0% interest rates that are driving development.  Those buildings don’t go up without all kinds of loopholes and tax breaks.

Prior to 1986, it was possible to trade commodities and pay 0% tax.  You put a spread on at the end of the year and carried a paper loss.  The next year, you’d reverse out of the spread and get all your money back.  At the end of the next year, lather rinse repeat.  It was called the tax spread and people outside of the commodities industry sheltered millions of dollars.  It ended with a Senator Bob Dole compromise so commodity trades are taxed at 60% capital gains and 40% whatever the highest tax rate is.  You also pay 100% of your tax on marked to market positions Dec 31 if you have a gain.

Is it fair to be able to set up a foundation, run money through it and avoid tax?  Nearly every extremely wealthy person has some sort of foundation these days.  They theoretically support charity, but really it’s a way to dodge some taxes.  If the charitable cause was so great, why don’t they just write a check?  It turns out some people even use foundations for political favoritism and personal gain.

The American tax code is so complex, it’s really impossible to get a square reading on what anyone with high income from different sources actually pays.  In many cases, it’s possible that they don’t even know what they pay-but they probably know exactly how much money they pay accountants and lawyers to figure it out and negotiate with the IRS for them.

Americans know the tax code is totally messed up.  It’s full of loopholes that only certain people can take advantage of.  That’s why a simple flat tax with no write offs is the way to go.  People like Donald Trump would actually pay a lot more in taxes than they do today.