4) There is nothing wrong in principle with using true economic losses to offset the tax that would otherwise be due on gains – but it also isn’t clever tax planning. The late, great Martin Ginsburg – a famous tax lawyer and the spouse of the recently deceased Supreme Court Justice Ruth Bader Ginsburg – once jokingly described what he called the “Herman tax shelter.” The idea was that, if you need, say, a $1 million tax deduction, your fictional accountant Herman could say: “Give me $1 million, I’ll steal it from you and go to a country where you can’t reach me, and voila, you have a $1 million theft loss.”
The joke was that it isn’t actually beneficial to generate tax deductions by actually losing money. For example, if the tax rate that you face is 37 percent, losing $1 million that is fully deductible generates a tax saving of only $370,000. So you are still $630,000 behind from the loss after tax. For this reason, the key to effective tax shelter planning has always been to generate tax losses that substantially exceed true economic losses (which can happen legally under appropriate circumstances). Trump therefore was not doing himself any good insofar as he actually lost money that he then got to deduct. (And the Times article notes that his tax losses substantially exceeded the amount of his depreciation deductions on business property).
Trump famously said in 2016: “I love depreciation.” And well he might, given its legally authorizing deductions for supposed losses in the value of properties that may actually, so far as one knows, be gaining value the entire time. However, losses well in excess of depreciation deductions offer evidence, admittedly not definitive, of “Herman tax shelter”-type results.
A related point is that there is no tax abuse as such in using losses incurred in one year to offset taxable income earned in another year, if the tax system allows such use of the “net operating losses.” Suppose that Taxpayer A earns zero in both Year 1 and Year 2, while Taxpayer B has a $5 million loss in Year 1 and a $5 million profit in Year 2. They have both netted to zero net income over two years (ignoring the negative time value of B’s having incurred losses before gains). So we shouldn’t mind if, in full legal compliance with the rules, B manages to avoid paying any tax in Year 2 because the loss carryforward offsets his net income for the year.
We therefore should distinguish between (a) Trump’s losing so much money over the years – be it from bad luck, bad judgment, or incompetence – and (b) his also taking a number of tax positions that, as I discuss next, appear to be questionable or even fraudulent. The real losses rightfully offset tax on the gains, insofar as using them in the way he did was legally permissible, and the adverse inferences to be drawn from them lie outside the tax system (although again, as per the fallacy in the “Herman tax shelter,” they do not reflect clever tax planning).