With Trump's tax records, little details could pose big problems

Donald Trump’s tax issues aren’t going away.

They’ll be a focus of Tuesday’s vice presidential debate. They’ll be dredged up on the campaign trail. But the central charge against the GOP presidential nominee – that he declared a nearly $1 billion loss in 1995, which allowed him to avoid paying income taxes for years afterward – does not appear to be a game-changer in this election.

What does matter – at least to a few independents in swing states – are issues related to those tax losses. As those issues emerge, they pose potentially new challenges to Mr. Trump’s campaign.

For Chris Wetzel, a right-leaning independent in swing-state Pennsylvania, it’s the size of Trump's losses that’s worrying.

“This sheds light on his business, the nebulous claims on how much he’s worth, the shady deals,” says Mr. Wetzel, who lives in Philadelphia and sells software to physicians. “Running the government is running the largest business in the world. This is an indication of how he might conduct himself as head of state, economically, at least, and yeah, that’s alarming.”

Ditto for Gerald Hemness, an elder law attorney in Brandon, Fla., another swing state.

"It isn't Trump's tax dodging that is offensive (well, maybe a little, but if legal, so be it),” he writes via email. “It is his intellectual dishonesty about it…. If you've done poorly enough to have legally paid nothing in taxes, don't also claim to be an incredibly successful businessman. The two don't play well together."

Beyond political concerns, Trump’s records raise questions about the effectiveness and fairness of America’s tortured tax code – and Americans’ conflicted views about it. On the one hand, Americans hold that no one should pay a penny in more income tax than they have to. On the other hand, there is a sense that everyone should pay their fair share. And a majority of Americans believe that some rich people and big businesses game the system to avoid paying their fair share.

Trump may or may not have gamed the system. The tax records leaked on Saturday are incomplete. But what is clear is that his proposed reforms would make the tax code even more advantageous to business owners like himself.

Leaked returns

The issue broke Saturday when The New York Times published a story based on the first pages of 1995 state tax returns for New York, New Jersey, and Connecticut, which the newspaper linked to Trump. The records show that he declared a $915.7 million loss in that year.

That loss was almost certainly a net operating loss carryforward, a popular feature of the tax code that allows businesses to smooth out their income, says Kyle Pomerleau, director of federal projects at the Tax Foundation, a nonpartisan, nonprofit research group in Washington. Slightly over 1 million taxpayers use a loss carryforward every year.      

For Larry Watkins, a retired general contractor in Lake Lure, N.C., Trump's use of the provision is no big deal. 

“All businesses take loss carryforwards,” says Mr. Watkins, who used the provision on a much smaller scale when he was working. “And in some cases, that keeps businesses going and it keeps people employed.”

That Trump used the provision “means he’s a smart man,” says Watkins, who plans to vote for the GOP nominee.

The partial records don’t reveal what made up those losses. It’s possible that Trump’s losses were merely depreciation on appreciating properties, Ben Page, a political scientist at Northwestern University in Evanston, Ill., writes in an e-mail. But “the whole cozy tax treatment of real-estate developers is likely to come under scrutiny.”

The sense that the tax system is unfair is broad-based, according to polls. Six in 10 independents say that some corporations and wealthy people do not pay their fair share of taxes, according to a 2015 poll by Pew Research Center. By a wide margin, Democrats listed it as a top concern, as did roughly half of Republicans surveyed. A 2016 Gallup poll found similar margins of concern that upper-income Americans pay too little in taxes.

The question is how much those concerns will affect Trump.

“I don't imagine that folks reading this are surprised” by the revelations, says Gordon Gray, fiscal policy director of the American Action Forum, a Washington-based center-right think tank.

Jane Ernst, a lifelong Republican and retired fashion saleswoman from Stuart, Fla., is not surprised. “He probably as a businessman has taken liberties in trying to better his financial position,” she says. Reluctantly, she has decided to vote for Trump.

Problematic reforms

The partial revelations about Trump’s taxes put his tax reform plans in a new light.

Corporate tax rates in the United States are some of the highest in the world. But while the US has not cut corporate taxes, it has cut tax rates for individuals. That has created an incentive for Trump and millions of other business owners to classify their companies as so-called “pass-through” entities. That way, they can report their business’s profits and losses on their individual tax returns rather than on a separate business return.

This allowed them to lower their tax rates by about six percentage points, says Mr. Pomerleau of the Tax Foundation.

Trump’s reform plan calls for reducing the corporate tax rate from a total 48 percent to 33 percent (when the double-taxation of distributions is included). And his plan would also lower the rate for pass-through companies to 15 percent. As a result, these firms’ current six point advantage over corporations would triple to 18 points, according to the Tax Foundation.

Such a reform, if it ever went through, could exacerbate old problems. “Some people are concerned about tax avoidance” in the plan, says Pomerleau.