donald j. trump , a self-proclaimed billionaire who paid no federal income tax for years, has conceded the tax code is <u+201c>unfair<u+201d> and says he alone can fix it. so it seems only fair to ask: how? last week i asked both the trump and clinton campaigns to explain how they would overhaul the tax code to ensure that mr. trump (and others like him) pay at least some federal tax. thus far, mr. trump has proposed nothing that would close even a single loophole that allowed him to amass a fortune and indulge a lavish lifestyle while paying no federal income tax for many years. asked about that in last sunday night<u+2019>s debate , mr. trump said he would end the favored tax treatment of carried interest (a special tax break for operators of hedge funds and private equity funds), as did hillary clinton . but that would cost mr. trump nothing, since carried interest is reported as capital gains, and he had none in 1995, the year for which the new york times obtained pages from some of his tax returns . nor would mrs. clinton<u+2019>s proposals to increase taxes on people in high-income brackets necessarily have any impact on him, since mr. trump apparently wasn<u+2019>t in an upper bracket for many years. he had no net income to report in the years he paid little or no tax because his near billion-dollar loss in 1995 allowed him to offset income for three previous years and as many as 15 years into the future. even so, it wouldn<u+2019>t be hard to make sure people like mr. trump pay at least some federal tax, experts told me this week. there<u+2019>s already a simple road map: although mr. trump didn<u+2019>t have to pay any federal, new york or connecticut income tax in 1995, he did have to pay income tax in new jersey. at the time new jersey took a much tougher approach to the kind of losses mr. trump took advantage of than did the federal government. (under subsequent governors, including mr. trump<u+2019>s staunch ally chris christie, new jersey amended its tax code so it<u+2019>s now as generous to real estate developers as the federal tax code.) since mr. trump hasn<u+2019>t released any of his tax returns, including the schedules from his 1995 returns, it<u+2019>s impossible to know the precise source of the nearly billion-dollar loss he reported and other losses he used to shelter his income for years. nonetheless, the returns reveal enough about the loopholes mr. trump took advantage of. here are four simple reforms that would almost surely close them: shorten or eliminate the period in which loss carry-overs can be used to offset other income. mr. trump was able to use his enormous loss to shelter income for up to 18 years. current federal law is even more generous. businesses and high-net-worth individuals like mr. trump, who get most of their income from so-called pass-through entities like partnerships and limited liability companies, can smooth their income streams by using losses to offset income in both past and future years. currently, losses realized in one year can be used to offset income reported in the two previous years and can be carried forward for as long as 20 years. the carry-over period was expanded to 20 years from 15 in 1997. tax experts generally favor some degree of loss carry-overs for businesses. but whatever the merits of such an approach, there<u+2019>s no reason it should be available to wealthy people like mr. trump. the vast majority of americans don<u+2019>t get to <u+201c>smooth<u+201d> their income by averaging good and bad years (though the tax code once permitted more modest <u+201c>income averaging,<u+201d> and it still does for some farmers and commercial fishermen). in 1995, new jersey didn<u+2019>t allow individuals to use net loss carry-overs at all, one of the main reasons mr. trump had to pay tax in new jersey. (new jersey now follows the much more generous federal approach.) neither pennsylvania nor massachusetts allows individuals to use loss carry-overs to offset future income. other states limit the number of years the loss can be carried over, some to as few as five years. the generous carry-over rule overwhelmingly benefits people who get all or much of their income from pass-through entities, and such income <u+201c>is highly concentrated among the top 1 percent,<u+201d> said lily batchelder, a tax expert and professor of law and public policy at new york university school of law. <u+201c>i wouldn<u+2019>t object to carving that back slightly,<u+201d> ms. batchelder said, but she was more supportive of allowing some degree of income averaging for individuals. <u+201c>it would benefit low- and middle-income people, who tend to have more volatile income than high-income families.<u+201d> ban the use of passive real estate losses to offset other income. even without his enormous loss carry-over, mr. trump would have paid no federal or new york income tax in 1995 because his pass-through losses from partnerships and limited liability companies, reported on his federal schedule e, more than offset all his other income. that loophole could be closed by restricting the ability of active real estate investors to use losses from their real estate activities to offset other income. thanks in part to lobbying by mr. trump and others, only <u+201c>active<u+201d> real estate investors like him can take advantage of the provision. the rest of us can<u+2019>t deduct so-called <u+201c>passive<u+201d> losses against other income. <u+201c>it would make sense to treat real estate like all other passive activities,<u+201d> ms. batchelder said. <u+201c>there<u+2019>s no reason to treat real estate in any special way.<u+201d> steven m. rosenthal, a real estate tax specialist and senior fellow at the urban-brookings tax policy center , echoed that point. <u+201c>another look at the passive loss rules for real estate professionals is warranted,<u+201d> he said. <u+201c>a real estate developer can leverage and depreciate his real estate rental investments, and apply the deductions against other income. i think we ought to return to the original formulation of 1986,<u+201d> which didn<u+2019>t allow it. limit depreciation deductions. even without the rest of his returns, the source of many of mr. trump<u+2019>s <u+201c>losses<u+201d> is no mystery: <u+201c>i love depreciation,<u+201d> he said during sunday<u+2019>s debate. no wonder: depreciation, which allows businesses to write off the value of fixed assets over time on the assumption that they are aging, declining in value and will eventually need to be replaced, is the largest noncash charge that can be used to offset income. it is especially valuable for real estate developers. depreciation schedules could be lengthened to reflect the reality that little, if any, real estate is worthless (indeed, many buildings gain in value) at the end of the current 39-year depreciation schedule for commercial real estate. end the favorable treatment of like-kind exchanges for real estate developers. the value of depreciation write-offs is supposed to be recaptured <u+2014> and taxed <u+2014> when property is later sold at a gain. but real estate investors can escape that tax if they invest the proceeds in another property in a so-called <u+201c>like-kind exchange,<u+201d> even if the properties are wildly different. many real estate professionals do that throughout their careers, so that when they die their heirs don<u+2019>t have to pay tax on any of the gain, effectively escaping tax for a lifetime and even beyond the grave. most tax experts agree the exemption of like-kind exchanges for real estate developers should be repealed. <u+201c>the like-kind rule should be eliminated, or capped at $1 million, as was proposed by president obama,<u+201d> mr. rosenthal said. there are plenty of other tax breaks that benefit real estate developers, but these few steps would have ensured that mr. trump paid at least some federal income tax in 1995, and almost surely other years as well. so how did the campaigns respond? like many people, mrs. clinton seems to have been taken aback by the size of mr. trump<u+2019>s reported loss and his ability to pay no federal tax for so long. mr. trump<u+2019>s returns <u+201c>show that even if you have extreme amounts of income and wealth, there are ways to take advantage of the tax code so you rarely report income and can even avoid any taxation,<u+201d> said jacob leibenluft, a senior policy adviser to mrs. clinton who served as president obama<u+2019>s deputy director of the national economic council. <u+201c>if hillary clinton is elected, we<u+2019>re going to take a close look and spend a lot of time to understand the parts of the tax code that allowed trump to do this and fix it, not because of trump, but because it<u+2019>s not fair and it<u+2019>s not good for our fiscal health.<u+201d> as for the specific proposals suggested by the tax experts, mr. leibenluft said mrs. clinton would eliminate like-kind exchanges as part of her tax reform proposals and would take a close look at passive loss rules. <u+201c>people reporting losses should have real economic losses and should bear real economic risk,<u+201d> he said. <u+201c>it<u+2019>s not clear that<u+2019>s true with trump.<u+201d> michael shapiro, one of mrs. clinton<u+2019>s economic policy advisers, stressed that her proposals to increase the estate tax and apply it to a wider range of rich individuals would help address the issue of people like mr. trump who amass billions in wealth without paying federal income tax. <u+201c>that<u+2019>s a backstop to make sure that even if you can<u+2019>t catch every single game they<u+2019>re playing during their lifetime, you get a safety net at the end to make sure people pay their fair share,<u+201d> mr. shapiro said. last week hope hicks, the top spokeswoman for the trump campaign, said she<u+2019>d <u+201c>get back<u+201d> to me about mr. trump<u+2019>s proposals. but that was before the lewd <u+201c>access hollywood<u+201d> tape surfaced , plunging the trump campaign and republican party into turmoil. since then, no one has responded to my requests for comment. a version of this article appears in print on october 14, 2016, on page b1 of the new york edition with the headline: how to mend the tax code to close trump<u+2019>s loopholes. order reprints | today's paper | subscribe
how to fix the tax code and close donald trump<u+2019>s loopholes
james b. stewart