How Can President Trump Pay Less Tax Than You?

A manager at McDonald's likely paid more federal income tax than President Trump did the year he took office.

The president's tax returns show he paid just $750 in federal income taxes each year in 2016 and 2017 and paid nothing at all for many years before that, according to reporting from The New York Times.

So how could the tax system allow someone with a lifestyle as lavish as Trump's — he owns ritzy golf courses, spends tens of thousands dollars on haircuts — to pay less tax than you or me?

Well, it helps to be a real estate developer. Lawmakers over the decades have passed friendly tax rules for real estate moguls, says Reuven Avi-Yonah, a professor of tax law at the University of Michigan. He says Trump and many real estate developers structure their companies as "pass-through" businesses, which gives them a host of tax advantages. For one, it lets them deduct interest on any loans that they have so they can reduce their taxes.

"Regular people, when they take out credit cards, for example, they pay a high interest rate. They don't get to deduct their interest," Avi-Yonah says.

Conservatives often say that lowering taxes for businesses can help the whole economy because that creates more jobs and lifts all boats. But there is a lot of disagreement about that.

"The system clearly is not fair," Avi-Yonah says. For example, he says, take another tax break that developers enjoy: When they own an apartment building, they get to treat it as if it were a piece of equipment in a factory that was suffering from wear and tear and falling in value.

But in real estate, you can get a tax break on that "depreciation" even if the building is not falling in value. Maybe it used to be worth $10 million and now it's worth $20 million. "It never made any sense to me to allow you to take a write-off for that depreciation when the building is not actually depreciating but rather appreciating," Avi-Yonah says. "There's really no justification for that."

Another thing that really helps lower your taxes: big losses.

Since 2000, Trump has reported hundreds of millions of dollars in losses on golf courses alone, according to The New York Times. His Trump International Hotel in Washington, D.C., the tax records show, lost $55.5 million. On top of that, there were big losses on Atlantic City casinos.

When Trump made big profits from his show The Apprentice, those losses, even if they came in different years, helped him a lot on his taxes.

"What you can do is use those losses to cancel out other income," says Daniel Reck, an economist at the London School of Economics who studies tax evasion and tax policy. He says what Trump did was not necessarily against the rules. But Reck says that when you have a big interconnected web of businesses like Trump's, money can flow offshore, it can flow through tax-exempt charities and you can hire a small army of lawyers and accountants.

"When you have a business empire," he says, "you can see how the complexity can help you find different ways to not pay tax."

But for that to work to the point where you pay no taxes year after year, you do have to have a lot of losses. Avi-Yonah says a big takeaway for him in the revelation of Trump's tax returns is that Trump's business empire appears to be floundering.

"I think he really is not a very good businessman," Avi-Yonah says. "His investments since 2011 have been reckless, and they've lost him a lot of money. And at this point, he really is at risk."

But, Avi-Yonah adds, "the fact that he's a bad businessman does not mean that he's not also cheating on his taxes."

Trump is being audited, so sooner or later we should find out whether the IRS thinks he broke the rules. [Copyright 2020 NPR]