The real Trump tax scandal: David Cay Johnston

Editor's note: This piece was published in 2016. 

There’s a big story in the tax returns that  President Trump claims he cannot release because of what he describes as a routine audit. The big story is not the true size of his wealth, but about how Congress has turned the income tax into a source of massive wealth for many of the richest Americans, including Trump.

That may seem hard to believe because the income tax burdens most of us. But the riches to be mined from the tax code are well known to America’s top tax lawyers and their clients.

Since 1986, Congress has accomplished what medieval alchemists and Sir Isaac Newton could not in their quest for a philosophers' stone that they believed would transform lead into gold. Our lawmakers have magically transformed income taxes into a source of wealth for many in the donor class by adding just a few lines to the nearly 6,500-page Internal Revenue Code.

It's all about tax rules that require you to depreciate, or reduce, the value of buildings over time, even if the market value of the structures is going up. If your depreciation is greater than your traditional income from work and businesses, Congress lets you report negative income. If these paper losses are just a dollar more than traditional income, it wipes out your income taxes for the year.

If Trump's returns show he has paid no income taxes in some years, that could be a reason he has not yet released details.

Congress says most Americans can deduct no more than $25,000 of real estate depreciation against their income. But if you work two days a week managing real estate and own enough that the depreciation exceeds your salary and other income, Congress lets you live income-tax-free. And for as long as you keep buying buildings and depreciating them, the tax does not come due.

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A decade after Trump graduated from college, he enjoyed a luxurious bachelor lifestyle in Manhattan while paying no income taxes. Depreciation on his buildings let him tell the IRS that his 1978 income was negative by $406,379. The next year, it was negative $3.4 million, according to documents I found in casino regulatory files.

To understand how reporting a negative income can be profitable, take a look at your pay stub. If Congress gave you a deal similar to Trump’s, instead of the government deducting taxes from your paycheck, you would keep that money — like an interest-free loan — and could use it to make more money.

Invest that money at 5% and then pay the tax 20 years later. For each dollar of tax, you'd pocket $1.65. Net 10%, and you’d pocket $5.73 for each tax dollar you didn’t pay.

Trump in 2011 claimed that NBC paid him $65 million a year for The Apprentice, a figure the network called “grossly inaccurate.” Let’s go with Trump’s number and assume he reports a negative income that year through the magic of depreciation. The federal income tax escaped on his Apprentice haul would be almost $23 million. Trump claims he is a world-class investor, so assume he earns 10% interest on it. After 20 years, that $23 million tax burden would be transformed into a $130 million net gain.

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About 2.1 million taxpayers report negative incomes annually, IRS data show. The IRS knows, but won’t say, how many of those are failed small business owners and how many are rich landlords like Trump. Congress has not asked.

That is not the only way the super rich are allowed to defer income taxes and profit from the money until it’s due.  Another rule lets managers of private equity and hedge funds defer taxes on unlimited amounts for as long as they choose. And still another allows executives delay until retirement much more of their income taxes than ordinary people.

The big story in Trump’s tax returns is that Congress has created two income tax systems, separate and unequal. One system burdens most Americans. The other enriches the donor class.

An audit is no reason for Trump to withhold his tax returns. Releasing them does not affect the IRS, and the agency has already said nothing prevents individuals from sharing their own tax information.  Moreover, Trump has no excuse for holding back tax returns from years no longer under audit.

It has been traditional for many years for presidents and candidates to release their tax returns. As of Sunday, of the two Democrats and four Republicans still in the presidential race, Trump was the only holdout.

Trump promotes himself as a champion of people whom he says Washington politicians and the donor class ignore. He could bolster that position by revealing his tax returns so we can determine how much of his wealth comes from his business acumen and how much from congressional tax favors.

David Cay Johnston, a Pulitzer Prize-winning investigative reporter, is the author ofPerfectly Legal, Free Lunch, The Fine Print and other books.

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