Search This Blog

Wednesday, May 8, 2019

The Nonsense About Trump's Old Tax Returns

The NY Times says it has gotten the information about President Trump's tax returns for nearly a decade starting in the mid 1980's and he lost over a billion dollars during that time.  This is supposed to be a blow to Trump's claim to have made himself a huge fortune in business.  Think about it.  The Times is crazy.  Trump in the early 1980s was a New York City developer.  His first big project, Trump Tower was built at the start of that decade.  He clearly didn't have a billion dollars.  In 1982 Forbes listed him together with his father as being worth 200 million dollars.  By 1989, Forbes listed Trump alone at 1 billion dollars.  Now Forbes is not certain to be correct, but it is the only public and independent listing of wealth during that time, and it has a certain respect as being mostly accurate.  So the Times would have us believe that Trump managed to build his individual wealth from something like 100 million to over a billion dollars all while losing huge amounts each year.  Even the editors and reporters at the Times must know that wealth doesn't work like that.  In order to grow your wealth, you need to have positive growth, not constant losses.

So how can this be?  The answer is that the Times is confusing taxable income with wealth.  The tax laws during the 1980s were a ridiculous maze of special provisions that Democrat Congresses had passed to favor the wealthy with tax shelters and other sorts of paper losses that could offset income.  Many of these special provisions for the wealthy involved real estate development or oil and gas drilling/production.  A typical deal might involve making an investment that would provide deductions for five dollars for each dollar invested.  Ronald Reagan finally succeeded in getting a major change to the tax laws.  Nearly every one of these tax shelters were ended along with some of the more dubious tax deductions along with a major cut in the tax rates.  As a result, it became much harder for the wealthy to shelter their income. 

Even after the change to the tax laws, however, most large real estate projects were able to shelter the income of the owners from taxes.  Imagine building a tower in New York for $300 million.  Let's say that the developer put up $50 million and borrowed $250 million.  If the interest on that loan was set at 10% (and that was about right in the mid 1980s), that's 25 million of interest each year.  Interest is deductible for tax purposes.  On top of that, the building is subject to depreciation.  Even if the depreciation is just straight line, it would still bring about another 25 million deduction each year.  That's a total of $50 million in deductions.  If the building had a positive cash flow of $20 million, it would all be sheltered by these deductions, and the building would show a loss for tax purposes even while it was extremely profitable. 

Now let's add that by 1990, after some years of prices rising in Manhattan due to the market and inflation, the building is worth $500 million.  The owner would refinance.  The $250 million mortgage at 10% would be paid off and it would be replaced by a $400 million mortgage at 7%.  (Interest rates had fallen.)  The $150 million in mortgage proceeds left after the refinancing would not be taxable income.  The owner would get this huge amount but it wouldn't show on the tax returns. 

Put this all together and it's pretty clear that tax returns from this era show little of moment insofar as total taxable income is concerned. 

No comments: