Trump's $916 million tax loss: The New York Times points toward poor tax policy

In this Sept. 29, 2016, photo, Republican presidential candidate Donald Trump speaks at a campaign rally in Bedford, N.H. (AP Photo/John Locher)

I’m not an American and I’m certainly not enamored of Donald Trump, but I was taken aback by the rather shoddy work of The New York Times in its analysis on October 1 of the few slim pages of the Republican presidential candidate’s tax returns.

The kind of anger a misleading story like this aims to stir up often leads to poor tax policy.

The Trump tax returns from 1995 published by the Times will raise new misconceived issues, this time with respect to the tax treatment of business losses.

Trump claimed a huge deduction in 1995 of $916 million for “other income losses,” as well as $15.8 million in losses on rental real estate, royalties and partnership income.

The sinister view is that by carrying those losses forward Trump avoided paying personal income taxes for up to 15 years, but we can only speculate on that.

It’s clear that several distorted conclusions are already developing:

Myth 1: Tax loss writeoffs are unfair. Criticisms are already being raised that it is unfair for tax losses to be used to shelter income from personal taxes. But putting further restrictions on the use of loss deductions would only increase the tax bias against risk-taking. The intent of loss provisions in the U.S. tax code is to ensure that risky investments are taxed no more heavily than safe ones. It is fair for the government not just to enjoy a share of an entrepreneur’s gains but also to share any losses.

Myth 2: A nearly billion-dollar loss claimed on his taxes shows how Trump made terrible business decisions. People are already concluding that the US$900 million loss is a result of financial losses. Maybe — but we don’t know for sure. It is entirely possible for investors to earn financial profits even as they’re incurring tax losses. This occurs when real estate, green energy and other investments are deliberately encouraged by policy through accelerated cost deductions and investment tax credits. In other words, Trump’s big deduction could come, at least in part, from doing what the government told him to do.

Myth 3: The write-off allowed Trump to pay no personal taxes for the next 15 years. The size of Trump’s write off tells us nothing about his income in future years, or whether he paid taxes on it. Trump could be subject to the U.S. Alternative Minimum Tax, which means he’d pay taxes regardless. One might argue that Americans are entitled to look at all of Trump’s income tax returns so they can find out the truth, but those would still only provide part of the answer, since Trump could have also have arranged to pay a portion of his taxes at the corporate level.

Maybe America’s unique history justifies these demands for transparency of income tax returns. And maybe Trump should have avoided the fuss by making his returns public in the first place.

But when fragmentary returns are used to allow political critics to exploit the public’s ignorance over tax policy, they’re not doing their country any favors. Instead, they may be encouraging more elaborate but also more harmful tax policy in the future.

We already saw that with the release of Republican presidential contender Mitt Romney’s tax returns in 2012, which led to a complete misunderstanding of business income taxation.

Romney paid taxes on profit distributions from his firm, Bain Capital, at favorable personal rates (15 per cent) but the profits were had already been taxed at the extraordinarily high 35 per cent corporate rate before he got them.

That reality got lost in the politics—along with the fact that America’s corporate tax rate is the highest in the developed world, and is one of the major reasons for slower-than average economic growth and high levels of economic frustration.