NEW YORK–(ENEWSPF)–August 22, 2016. Last week, we learned that Donald Trump owes hundreds of millions to Deutsche Bank and a shadow bank, and also is making millions through partnerships funded by lenders including the state-owned Bank of China and Wall Street. At the same time we’re learning about the extent of his debts, his campaign revealed a massive new tax shelter for high-debt businesses, in industries like real estate.
This new “King of Debt” tax shelter would actually result in some circumstances in a negative tax rate on borrowing for projects like Trump’s real estate deals – meaning that instead of wealthy taxpayers like Donald Trump paying their fair share, taxpayers would be paying Donald Trump to run up huge debts.
Just as we are learning just how much Donald Trump owes in debt to interests he says he’ll hold accountable, we’re seeing how he’ll go to incredible lengths to reward himself for running up debt through the tax code. Today, in remarks to the Ironworkers Convention in Nevada, Senator Tim Kaine will call out Donald Trump for creating a new tax shelter that rewards the hundreds of millions in debt we now know he’s run up in his businesses. Kaine will explain how Trump’s tax proposals benefit high-income businesspeople like Trump – rather than helping working families, or asking the wealthy to pay their fair share.
The memo below explains how Trump’s tax plans combine two tax breaks – immediate expensing and interest deductibility – to create a major new tax shelter that could result in negative tax rates for high-debt projects, like his own.
As experts from the left, right, and center have learned about Trump’s new proposal, they’ve overwhelmingly panned it. The Wall Street Journal, in an article entitled, “Donald Trump’s Tax Ideas Could Boost Debt-Laden Real Estate Firms,” said, “Donald Trump’s emerging tax plan could benefit leveraged real-estate companies like the one he runs with new and substantial subsidies. The Republican presidential nominee appears poised to combine two policies that House Republicans—and tax analysts from both parties—say shouldn’t be paired: letting businesses deduct interest and allowing expensing, or immediate write-offs, for investments in equipment and buildings. Current law requires businesses to spread those deductions over multiple years. The result would provide negative tax rates for investments financed with debt, creating incentives for companies to pursue projects that wouldn’t make sense economically without the tax benefits.”
MEMORANDUM FOR INTERESTED PARTIES
FROM: HFA Policy Team
DATE: August 22, 2016
SUBJECT: What We Learned Last Week: Donald Trump Has $650 Million in Debt and is linked to Loans from China and Wall Street – and a Tax Plan that Creates a “King of Debt” Tax Shelter for High-Debt Businesses Like His Own
Earlier this week, we learned from the New York Times that Donald Trump and his companies owe at least $650 million in debt – far more than could be discerned from public filings. And furthermore, his wealth is “tied up in three passive partnerships that owe an additional $2 billion to a string of lenders.” He owes hundreds of millions to Deutsche Bank and a shadow bank, and also is making millions through partnerships funded by lenders including the state-owned Bank of China, and big Wall Street banks like Goldman Sachs.
We know that Donald Trump’s business model relies on a high degree of debt, whether it was overleveraging Atlantic City casinos that eventually went bankrupt, or the loans from China and Wall Street he’s linked to through partnerships today. That’s why Trump has called himself the “King of Debt.” Of course, because he will not release his tax returns, we do not know the full extent of how much Trump owes and whom he owes it to – whether it is to foreign banks, investors, or even other state-owned institutions; or interests like Wall Street that he promises to hold accountable.
Still, the timing of this revelation was notable because it comes just days after the Trump campaign revealed that – in a move that went largely unnoticed at the time – he had added a new element to his tax plan earlier this month that would make it possible for high-debt investors like himself to get a tax subsidy from the Federal government for borrowing for new investments.
Specifically, the Trump campaign made a surprising admission to Washington Post columnist Allan Sloan, revealing that his new tax plan has another trillion-dollar-plus tax shelter that benefits Donald Trump when he borrows money for his projects – taking on debts we now know run into the multiple hundreds of millions.
This new loophole – described below – creates a huge tax break for real estate investors and other highly-leveraged businesses. This may sound complicated and technical, but the bottom line is that this does not just cut taxes for people like Donald Trump, it actually provides a negative tax rate in some circumstances when they borrow. In other words, instead of wealthy businesspeople like Trump paying their fair share in taxes, it would be the other way around: taxpayers would be paying wealthy businesspeople like Trump to take out large amounts of debt for their projects. With new revelations about just how much Trump owes in debt, the fact that he wants to create a massive new tax shelter for high-debt businesspeople, especially in the real estate industry, shows just how far he’s willing to change the tax code to benefit himself:
- Wall Street Journal (Richard Rubin): Donald Trump’s Tax Ideas Could Boost DebtLaden Real Estate Firms: “Donald Trump’s emerging tax plan could benefit leveraged real-estate companies like the one he runs with new and substantial subsidies. The Republican presidential nominee appears poised to combine two policies that House Republicans—and tax analysts from both parties—say shouldn’t be paired: letting businesses deduct interest and allowing expensing, or immediate write-offs, for investments in equipment and buildings. Current law requires businesses to spread those deductions over multiple years. The result would provide negative tax rates for investments financed with debt, creating incentives for companies to pursue projects that wouldn’t make sense economically without the tax benefits.”
- Washington Post (Allan Sloan): The Whopping $1.2 trillion omission in Trump’s tax reform plan: “ending the interest deductibility on new loans would devastate the value of commercial real estate — which is a major business for Trump…In a telephone conversation, [Trump Advisor Larry] Kudlow, whom I like and respect, told me that Trump was against ending the deductibility of interest for new business borrowings…not ending deductibility would blow a $1.2 trillion hole in the Republican proposal.”
We already knew that Trump’s tax plan gives trillions in breaks to millionaires, Wall Street, and big corporations. Adding expensing with limits on interest deductibility would add another roughly
$1 trillion over 10 years. And by not limiting interest deductibility in his plan, Trump’s new proposal goes from increasing the cost of his tax plan by $1 trillion to adding over $2 trillion in costs—the $1.2 trillion in additional costs reported by Sloan. Trump promised that his tax plan would make the wealthy pay their fair share – instead, he has not only doubled down on tax breaks for the wealthy, but added new ones. To make matters worse, we can’t nail down how much all these tax breaks would benefit Donald Trump himself, because he still refuses to make his tax returns public. And this new loophole is in addition to his estate tax repeal proposal that would cut taxes for Trump’s family by $4 billion and the so-called “Trump Loophole“ which cuts tax rates on business income to 15%, likely cutting tax rates on much of Trump’s income by more than half.
How This New Loophole for High-Debt Businesses Works: We knew from Trump’s speech last Monday that he was adding a new element to his tax plan – the immediate expensing of business investments. This proposal lets big businesses immediately write off the cost of new projects (small businesses can already do so under Section 179 of the tax code); expanding the cost of his tax cuts for corporations beyond the $5 trillion over 20 years he’s already called for.
But there’s another problem with expensing in Trump’s plan. Under current law, companies can deduct the cost of interest on loans they take out from their taxes. This is an important tax provision for industries – notably real estate – that rely significantly on debt. But if this provision is kept in the law while adopting immediate expensing for large businesses, it creates a massive tax subsidy—especially to industries, like real estate, that invest in assets that depreciate only slowly over time. It allows companies to take on a significant amount of debt for a new investment, writing off the cost of that investment in the current year, but then also getting a tax break in future years on the cost of the interest they paid on the loans that financed that investment. The Congressional Budget Office explains, with the combination of immediate expensing and no limits on interest deductions, “the effective tax rate on income from debt-financed investments…would be sharply negative, at -61 percent for C corporations and -34 percent for pass-through entities…”
A negative effective tax rate is not just a tax cut that reduces the amount wealthy taxpayers owe – it actually means wealthy taxpayers are effectively getting paid by the government when they borrow. Trump’s plan means taxpayers pay him to run up debt, not the other way around. Given the new revelations about how many hundreds of millions of dollars he owes in debt, the fact that he would create this new loophole for high-debt businesses shows just how far he’s willing to go to benefit himself, and enable his high-leverage business model.
How Trump Goes Further Than Even Republican Plans: Even in the regressive House Republican tax proposal, championed by Speaker Ryan, immediate expensing is paired with the elimination of interest deductibility, with the plan explicitly noting that “allowing both together would be distortive as it would result in a tax subsidy for debt-financed investment.”
Many experts expected that Trump would do the same – but then his campaign confirmed that, unlike Ryan’s plan and others, he was leaving interest deductibility intact. His original,
September 2015 tax plan even stated that it would “phase in a reasonable cap on the deductibility of business interest expenses.” But Sloan’s reporting confirms he has no intention of capping the interest deduction. This difference takes the cost of his expensing proposal from about $1 trillion to over $2 trillion by preserving interest deductibility – which is why Sloan reports this tax break as adding $1.2 trillion, according to the conservative-leaning Tax Foundation.
Since the Trump Campaign came out with this new tax shelter, both the Washington Post and the Wall Street Journal have published articles with takes from leading experts in tax policy. Both the left and the right are worried about this plan. Lily Batchelder, NYU Law Professor and former NEC Deputy Director for President Obama, said that “this is converting the tax code basically into a direct spending program for anything that people can get a tax lawyer to say is debt-financed business investment.” Alan Viard, of the conservative leaning American
Enterprise Institute called it “excessive.” Steve Rosenthal, of the independent Tax Policy Center, said that this loophole would “open up huge arbitrage opportunities.” Republican economist Douglas Holtz-Eakin, seemed bewildered by Trump’s position on expensing and interest deductibility saying, “I don’t know where he is. It’s very weird…It’s all very murky.”
According to Reports, Trump Personally Intervened on His Tax Plan Regarding the Treatment of Debt: A New York Times story last weekend gives an indication of where this idea may have come from: Trump himself. As the Times reported, the taxation of debt was basically the only part of Trump’s tax plan that he focused on:
“On matters of policy, too, Mr. Trump has engaged only fleetingly, and idiosyncratically. Before delivering a policy speech in Detroit on Monday, he delegated the formation of an economic plan to a few conservative economists outside his campaign, who consulted him from time to time and ultimately haggled over the details in his office as he followed their conversation.
Stephen Moore, a Heritage Foundation fellow, said he and Arthur Laffer, the supply-side economist, had tangled over the top tax bracket while Mr. Trump observed from behind his desk, eventually siding with Mr. Moore. Mr. Trump, he said, also expressed strong views about the taxation of interest on business loans, citing his experience as a developer.”
It’s no surprise Trump might have focused so much on preserving the deductibility of interest, even as it creates a massive tax shelter. Real estate often involves highly leveraged projects, which benefit from the interest deduction – and we now know that Trump himself has borrowed hundreds of millions of dollars in the course of his own business.
Trump said he was going to focus tax cuts on the middle class – but instead he’s adding new tax cuts for the wealthy: These new modifications to Trump’s tax plan have largely been hidden from view even as Trump tries to press “reset” and claim – falsely – that his plan would require the wealthy to pay their fair share. In fact, Trump has yet to put forward a single measure that would raise taxes on the wealthy – and instead, in his economic speech last week, he doubled down on the repeal of the estate tax, which would benefit his family to the tune of $4 billion, and the “Trump Loophole,” a 15 percent rate on pass-through income that would overwhelmingly benefit high-income taxpayers. With this new tax shelter he’s introduced, he’s adding about $2 trillion over 10 years in tax cuts for the wealthy and large businesses that wasn’t in his original plan.
Moreover, the original score by the Urban-Brookings Tax Policy Center made generous assumptions that Trump was limiting deductions and corporate loopholes he had never specified (specifically, their score assumed a 10% limitation on tax deductions, a doubled rate for the PEP and Pease phase outs and the repeal of a range of business tax loopholes, lowering the cost of his tax plan by almost $4 trillion over 20 years – although it still added $34 trillion to the debt over that period even with those generous assumptions.) Now that he is taking steps that expand some of the loopholes he previously committed to closing, it seems unreasonable to give him credit for closing loopholes he didn’t even mention.
To the extent that Trump does put forward limits on deductions or loophole closers, they should not significantly affect the score of his plans, because scorekeepers have already taken them into account. When the costs of all of the new tax cuts are tallied it seems pretty clear that Trump has done much less than advertised to bring down the cost of his plan, and in fact even offered new tax breaks focused on the wealthy.
Trump has shown over and over again that he’s just in it for himself – and we don’t even know how much because he won’t release his returns: Each day we get closer to the election, it becomes more and more clear that Trump is just out for himself. He promised to cut the cost of his tax plan and focus on tax relief for the middle class, but instead he just doubled down on tax cuts for the wealthy. This new tax cut takes things a step further: not only does he want to give himself and his family a $4 billion tax break, now he wants the American taxpayers to fund his debt-leveraged real estate projects. To make matters worse, no one except Donald Trump and his army of tax lawyers know how much he’ll benefit from his own proposals, because he refuses to release his tax returns.