Despite the surfacing of a tape with extremely lewd comments and ensuing allegations of sexual assault, questions about taxes continue to dog Donald Trump's run for president. These questions don't revolve around Mr. Trump's tax plans for the country but around his own personal history of paying--or more precisely, not paying--income taxes.
Attention has repeatedly focused on the large loss that Mr. Trump reported on his 1995 state tax returns and whether Mr. Trump has paid his fair share of income taxes. Much of the coverage of the leaked returns has concerned whether Mr. Trump was able to use the net operating loss deduction to avoid paying federal income tax for nearly two decades. Some have also speculated about whether Mr. Trump benefited from tax loopholes for the real estate industry or even engaged in questionable tax planning. However, others have objected to the focus on Mr. Trump's returns, pointing out that the net operating loss deduction is generally available to businesses and in no sense a nefarious means of reducing one's tax bill.
Unfortunately, by focusing on how much income tax Mr. Trump paid, this coverage -- and the larger political debate of which it is part -- misses the real point of the questions swirling around Mr. Trump's taxes. The point is not how much tax Mr. Trump paid but, echoing other questions surrounding his candidacy, what Mr. Trump's taxes have to say about his fitness for office.
To understand why, it helps to see how the critics of the coverage regarding the leaked returns both have a point and miss the point. It is true that, in the abstract, the net operating loss deduction is unobjectionable. This deduction aims to equalize the treatment of businesses with steady income flows and those with volatile income flows. Within limits, the net operating loss deduction allows a business to use its excess deductions from a "bad" year against income from a "good" year to produce a more accurate picture of its overall income. The goal is to ensure that a business is neither advantaged nor disadvantaged based on how steady its flow of income is.
But as this description makes clear, the net operating loss deduction is not a single item but really the sum of all of the different deductions that a taxpayer has taken. Without seeing Mr. Trump's full federal returns, it is impossible to know what sort of deductions contributed to the 1995 loss and whether that loss was properly taken.
The only hint regarding the nature of those deductions has been Mr. Trump's own mention at the presidential debates that he benefited greatly from depreciation deductions. As any tax professional will tell you, depreciation deductions are a tax accounting mechanism for matching income with the cost of producing that income. Put differently, depreciation deductions reflect no actual expense -- they are merely an accounting mechanism for spreading a taxpayer's investment in property over the years when that property produces income. Because they involve no real expense, inflated depreciation deductions were at the heart of tax shelters that the government shut down in the 1980s.
To assume that Mr. Trump's depreciation deductions -- or, for that matter, any of the other deductions that contributed to his large loss -- were properly taken would be an exercise in credulity. Even before the leaked 1995 returns, reporting regarding the Trump Foundation raised questions about possibly aggressive tax planning by Mr. Trump. According to news reports, Mr. Trump may have instructed that money owed to him be paid instead to his charitable foundation. A basic principle of tax law prevents taxpayers from avoiding tax by having their income paid to others (especially others in lower tax brackets or, like the Trump Foundation, who are exempt from income tax altogether). Questions have been asked -- but not adequately answered -- about whether money was paid to the Trump Foundation at Mr. Trump's behest and whether it was reported on his federal income tax returns.
The questions about how aggressive Mr. Trump has been in his personal tax planning bring us to the real point. As it is often said, it is not the destination but the journey that matters. Few would hold it against Mr. Trump if it turns out that he paid little or no taxes after doing his best to minimize taxes squarely within the bounds of the law (though we may hold it against Congress for creating the loopholes that got him there).
But the little information that has been reported raises questions about how Mr. Trump got to his low- or no-tax destination. There are legitimate questions about whether he pushed or even crossed legal boundaries, and the troubling nature of these questions is only exacerbated by Mr. Trump's refusal to release his federal tax returns.
Mr. Trump aspires to an office that is entrusted with the task of faithfully executing federal law, including the federal tax laws. As someone who has devoted his career to teaching and writing about our tax laws, I can tell you that whether Mr. Trump has followed or flouted these laws in the past bears directly on his credibility in carrying out that task. A president who has flouted the tax laws would set the wrong example for taxpayers and undermine our self-assessment system by encouraging similar behavior.
To resolve the questions swirling around his personal tax history and his fitness for office, Mr. Trump must promptly release his federal tax returns so that the American people can judge for themselves whether he deserves to be trusted with the task of faithfully executing our tax laws.