The New York Times released a “bombshell” report revealing that President Trump paid a mere $750 dollars in federal income taxes during the first year of his presidency. Already, it has prompted a larger conversation on the structure of our tax code. Sens. Bernie Sanders and Elizabeth Warren have taken the opportunity to demand once more that the United States “tax the rich.”
At the end of the day, it’s just not as simple as that. Merely increasing tax rates would not increase the president’s federal income tax liability because he has none. Sanders and Warren know that, too. Instead, they’d happily force him and other rich businesspeople to pay more by eliminating or restricting the deductions they use, but these deductions aren’t worth tossing out just because Trump found a bunch of ways to get out of paying the government. After all, these same deductions have granted tremendous benefits to our economy, helping out the rich and poor alike. Here’s how.
The New York Times investigative report discusses the staggering business losses the president has sustained. In 1995, he reported a near $1 billion loss, and his 2018 taxes show a $47.4 million loss, which he wrote off. The tax provision here that allows him to do so is called the net operating loss deduction, which business owners use to carry forward their losses to future tax years or carry them back to past years to get an immediate rebate. This deduction is a crucial part of a tax code that rewards the risk entrepreneurs take in starting a business. It also helps them survive tough economic times like the first few years of business, when many firms struggle to make a profit. For Trump, the context of these losses is likely the real estate collapse during the 1990s and his businesses that have struggled to turn a profit, the casinos and golf courses.
In the wake of the COVID-19 recession, the NOL deduction is especially important. Millions of businesses have seen drastic cuts in their cash flow due to mandatory government shutdowns and the nature of a public health crisis on spending. Without this deduction, many more would be forced to close permanently, leaving their employees without a job and income. NOLs give businesses some measure of surety that brighter days are ahead and that the government will not take the bulk of their future profits in taxes, which rewards entrepreneurship, risk-taking, and the job-creating spirit of our country.
The fact that Trump benefits significantly from the NOL deduction shouldn’t cause lawmakers to restrict or eliminate it. After all, this would have dire economic consequences for businesses both small and large.
This, of course, is not to shrug off the complaints against Trump here. Decades of businesses accumulating NOLs certainly raises questions about whether he indeed set up businesses without a profit-seeking motive. We should know, too, whether he designed some businesses for the purpose of accumulating losses that he could use as a tax write-off. If that’s the case, this would surely disqualify him from taking deductions relating to the operations of those businesses. However, this particular battle is between him and the IRS, and it’s not evidence that the NOL deduction is broken.
If lawmakers want to make a pro-growth tweak to the NOL deduction that’s also likely to make people like Trump pay more in income taxes, they can accelerate NOLs to the year they are incurred instead of allowing them to be carried forward to future tax years. This change would mean that businesses that incur losses in a year would get an immediate rebate (much like an NOL carryback) instead of having the ability to deduct these losses in future tax years. It would help new entrepreneurs survive recessions by providing them immediate cash liquidity during tough economic times and ensure that folks like Trump can’t continue to take advantage of the NOLs they incurred decades ago.
According to the New York Times story, the president also nabbed another popular deduction: depreciation. This allows people to depreciate the cost of their capital investments (think of machinery, equipment, and structures) off of their income taxes over a number of years. Yet it’s unclear why we’re surprised that Trump, a high-end real estate developer, benefits from depreciation. He’s got quite a few structures to his name, and depreciation, especially for structures, is the most important deduction in our tax code. It encourages capital investments that create jobs, increase productivity, and grow wages. In short, eliminating depreciation would devastate the economy.
That said, there is a way to reform depreciation schedules in a way that would grow the economy and possibly prompt the president to pay more in taxes over the long run. For example, adopting full expensing for structures would allow investors to deduct the full costs of their investments immediately from their income taxes instead of having to deduct these costs over 27.5 and 39 years depending on whether or not the building is residential. According to the Tax Foundation, full expensing for structures would lead to 224,000 new jobs, grow wages 1.2%, and grow GDP by 1.4%.
It would also give real estate investors like Trump a large, one-year tax write-off instead of a continual 39-year tax write-off that can lower their tax liability. If they want to see a continuous tax benefit from depreciation, full expensing would force some businesses to make yearly investments that grow the economy, lending a hand to workers and owners alike.
President Trump’s tax history isn’t simple or clean by any means, but that doesn’t mean we should hop straight to a complete do-over of our entire tax code, eliminating every deduction that business owners use to lower their tax liability. Instead, lawmakers should look at other options that will actually help business owners instead of punishing them for others’ sins. Anything else would be unfair.
Travis Nix (@tnix113) is a Young Voices contributor and a student of tax law at Georgetown Law. His tax and budget commentary has been featured in Fox News, National Review, the Washington Examiner and the Chicago Tribune.
