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Every once in a while, a breaking news story is on a topic that I actually understand. The September 27 New York Times article, "Long-Concealed Records Show Trump’s Chronic Losses And Years Of Tax Avoidance," is one such story. Many reactions to it show considerable misunderstanding and confusion on how the tax system works.
The story isn’t exactly new. Two of its authors wrote on the same topic in a Times article four years ago.
The reason Trump avoided paying taxes for so long was because he lost an enormous amount of money – some $912 million – in 1995. (According to Paul Freidel of Freidel & Associates, LLC, "Real estate has been a tax-favored business since tax reform in 1986. Oftentimes real estate investors report large tax losses due to favorable depreciation and gain deferral rules, even as their holdings increase in value.")
The tax code generally allows anyone to offset money lost in certain unprofitable business ventures against future taxes, or even past taxes in some cases. The idea is that the code taxes net profit, which means after expenses and losses. If a person has net income of $100,000 one year and then loses $100,000 the next year, their net income for the two years is zero. Claiming a refund for past taxes is sometimes possible, or the person can use the loss to offset future taxes until the $100,000 loss is fully offset against $100,000 in income. This provision will offer some relief for example, to small business owners who have suffered severe pandemic-related losses in 2020.
Regardless of the legality of their filings, when rich people pay no taxes in any one year, the response from the public and talking heads is usually outrage. I heard words like "felon," "illegal," "tax cheat," and "evasion" used liberally to describe Trump's tax filings. A 2015 poll done by YouGov and reported by the Independent, March 1, 2015, found that 59 percent of people think it is wrong to legally avoid taxes.
