Surprisingly, it turns out that Trump and I have something in common. We both avoided paying taxes by not making any money. This is, of course the easiest way to avoid paying income taxes. There is a difference, of course. When I don’t make any money, I don’t have any money. When Trump (and people like him) don’t make any money, they still have plenty of money.
We don’t have the details of how Trump was able to pass through a billion (with a B!) dollars in corporate losses onto his personal return, but the details of hedge funds that Mitt Romney showed us gives us a clue.
So, a leveraged buy out (LBO), like Romney used to do, works a bit like this. A bunch of guys borrow a big pile of money, let’s say $100 million dollars. They then buy a company for $80 million and pocket the $20 million difference. They then use the cash flow from the company to pay the $100 million. If somehow, the company manages to pay the debt plus all its other obligations (usually by laying off employees and cutting production costs), the LBO guys win twice when the sell the company at a profit. They pocketed the loan money going in and the capital gains going out.
And if the company tanks? The LBO guys still win. They have the $20 million already in their pockets and declare bankruptcy on the loan. With the debt written off, they can sell off the carcass of the company to make a few extra bucks, and judging from Trump’s returns throw off “losses” for tax purposes.
Or to put it another way. Find a $300,000 house to buy. Borrow $500,000 to buy it. Put $200K in your pocket. If the house appreciates to $600K, sell and pocket another $100K. If the value stays the same or goes down, declare bankruptcy, stick the bank with the loss, AND declare hundreds of thousands in losses to avoid taxes on any other income you might have. Is this how things work for you?
I am pretty sure that this is how it worked for Trump. I don’t believe for a second that he had $2 billion in the bank in 1994 and that he lost a billion of his money that year. Judging from his own comments, it is pretty clear that he borrowed a ton of money and used it to buy companies.
He then (as the NYT put it) mismanaged those companies into oblivion, declared bankruptcy, stiffed the banks, and then passed on the losses to himself as personal losses. Even though he was not really the person who lost money, he may not have even had any skin in the game!
This, more than anything, is the problem with American business. It is not really what most people call a capitalist system for those at the top. For them it is a win-win situation. If their businesses make or lose money, they never really lose.
Like the CEO of Wells-Fargo. Even though he presided over a criminal enterprise, he will still come out with millions of dollars in his pockets. The system is rigged, but it is rigged in favor of people like Trump!
Trump is clearly not a solution to any of our problems.
He is symptom of those problems, a cancer in the American economy.