October 04, 2016
A NYT piece discussing the tax rules surrounding business losses like the $916 million loss taken by Donald Trump on his 1995 tax return left out an important aspect of the law. The piece points out that many small businesses are organized as “pass-through” corporations, which means that the profits, or losses in this case, are directly passed through to the owners to declare on their tax returns.
However, these corporations also have the important benefit of limited liability. This means that if Donald Trump’s business dumps hazardous waste in a poor neighborhood, leading to an increase in birth defects and cancer, the victims can only sue Donald Trump’s corporation, not Donald Trump. If the corporation goes bankrupt, then the victims would be out of luck, even if Donald Trump still was a very rich person. They would not be able to go after his personal assets.
The rationale for the corporate income tax is that the corporation is an artificial individual. (This is also the basis under which the Supreme Court has bestowed it with free speech rights.) The income tax is a quid pro quo for the benefits of corporate status. A pass-through corporation gets to enjoy the benefits of corporate status without having to pay the corresponding taxes.
It may not take a “genius” like Donald Trump to take advantage of this loophole, but it was a pretty good sleight of hand to slip it into the tax code. It’s yet another way to redistribute income upward.
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