Guest Post by Karl Denninger
Oh my, the breathless NYT reports, after aiding and abetting breaking the law by releasing part of a NY state tax return that was stolen (if it’s a true copy) from Trump.
The return showed a roughly $900 million net loss one year.
This, the Times reports, means that Trump may not have paid any federal (or state) taxes for many years.
To which I say: So what?
Let me remind you that the way you generate a net operating loss (NOL) is by losing money. In this case (if the return is factual) Trump lost a lot of money. The tax code allows you to reduce your tax liability when you lose money until your operating income reaches zero (and I remind you, the last 10 to 30 grand of it has already reached a zero payment liability, so you in fact “throw away” that amount worth of tax “benefit” right up front) but you cannot get a refund on previous taxes paid as you accumulated that capital when you take a loss.
What happens instead is that the loss is rolled forward and you may take up to $3,000 a year against future income until it is exhausted, and you may also offset it dollar-for-dollar against future profits.
There’s nothing wrong with this. You lost actual money to generate the NOL in the first place. That ability to use it to offset future gains isn’t “ripping off the government” or “ripping off poor people” since the loss actually happened and in fact you get screwed when you take a NOL because you are forced to consume that loss with inflated dollars in future years, but you cannot adjust the NOL for inflation!
I have personally had an NOL in the past and so have millions of others. There’s not only nothing wrong with it it is in fact only a partial recapture against a real loss of capital you already suffered.
Let’s say that I make a bad investment and lose $500,000. My income that year from investments was $100,000, but I lost half a million in capital. It’s gone — I really lost it — and the law says that the loss must be crystallized, not on paper, for it to count (in other words I had to have closed the position.)
Ok, so I have a NET -$400,000 from investments this year. I can only take $3,000 of that against my ordinary income; that is, if I had $50,000 worth of W2 income (from a job) the law says I cannot use the $400,000 loss to reduce the $50,000 to zero — only to $47,000. I can continue to take that $3,000 (yes, it’s that tiny!) every year forever until it’s consumed, but if I have an investment gain in future years the remainder of the NOL carries forward and is an offset on that gain dollar-for-dollar until it is “used up.”
Anyone who invests has, at some time, probably had one of those NOLs. There is nothing evil, wrong, duplicitous or anything of the sort about taking and using them in future years as they only are usable when you regain, through your hard work, the capital you previously lost and at the time you previously gained it in the first place you already paid taxes on it!
To suggest otherwise or that someone, such as Trump, is evil for having one and thus paying no tax in future years until it was/is consumed is outageous. Such a suggestion is equivalent to demanding that someone pay taxes on something that has been lost or stolen from them and any politician or media outlet that implies or states same ought to be run out of town on a rail.
Why? Because it is equivalent to demanding “heads I win, tails you lose“. To demand that someone pay taxes when they make money but when they lose money they cannot offset that loss against future gains means that you’re now obligated to pay when you win and also in effect you are obligated to pay when you lose (irrespective of the reason) as well, because an actual net operating loss loss destroys part of your capital base!
Trump, if this return is accurate, did what every single company and individual taxpayer with investments does when there is a net loss. There is not only nothing wrong with it the tax code already penalizes you for net operating losses because you cannot offset them dollar-for-dollar against current wage income; you can only take the $3,000/year. Since capital losses are in fact destroyed capital (from your point of view) you should be able to deduct them fully against AGI, but that’s not how the law works — you can only deduct them against future business or investment (e.g. net operating) gains.
That is not an abuse of the tax code. What is an abuse of the tax code is to “donate” money to a “charity” (your own family foundation), radically reducing your income (and thus tax liability) that you control and which then turns around and spends nearly none of the donated funds on actual charitable services; rather, nearly all of those funds are used to pay salaries and travel (effectively living expenses and high-on-the-hog living expenses at that!) for your family members and their friends. That is legal but it’s slimy as hell and that is what the Clintons have in fact done since leaving the White House.
The NY Times is a hack outfit — not only did they run a story predicated on a criminal act they are trying to spin something that is not only lawful but every person who either runs a small business or invests does as a matter of course and is perfectly ethical, legal and in fact already occurs under mandated-by-law disadvantage that accrues to someone who has this happen, including Trump, in the tax code!
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