Trump's tax trick, explained

How Donald Trump doesn't pay federal income tax
How Donald Trump doesn't pay federal income tax

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How Donald Trump doesn't pay federal income tax 03:40

Story highlights

  • Edward McCaffery: It appears Trump borrowed money for his casinos, lost the money, then claimed that loss so he could avoid taxes
  • He notes we don't know if the plan worked, because Trump will not disclose any of his tax returns

Edward J. McCaffery is Robert C. Packard trustee chair in law and a professor of law, economics and political science at the University of Southern California. He is the author of "Fair Not Flat: How to Make the Tax System Better and Simpler." The opinions expressed in this commentary are his.

(CNN)In early October, a few pages of Donald Trump's state tax returns mysteriously mailed to The New York Times revealed he had claimed a $916 million loss -- well over a billion in today's dollars -- which he could use to avoid taxes for nearly two decades.

I wrote in this space that it was wrong to assume the large loss came from Trump's own money. Now we know it did not. The Times found documents from Trump's casino bankruptcy that show Trump's path to tax-free living.
    Edward J. McCaffery
    The Times article, as with other reporting on the issue, is long and complex: It is after all not easy to avoid paying taxes on a billion dollars of earnings, especially using other people's money. So, for nonexperts, here is a summary of Trump's three-step plan to avoid taxes:
    1. Trump borrowed a billion dollars.
    2. Trump lost the billion dollars.
    3. Trump used the billion-dollar losses from other people's money to avoid paying taxes on his own earnings (if any) -- up to hundreds of millions of dollars of possible tax savings for Trump, alone.
    What Trump and Clinton's tax plans mean for you
    What Trump and Clinton's tax plans mean for you

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    What Trump and Clinton's tax plans mean for you 02:54
    The Times reporting makes clear that Trump's specific tactic, trading his partnership debt for an ownership interest, was not necessarily proper at the time. Trump's own well-paid and well-heeled lawyers told him, in the coded language of tax opinions, that it would likely not survive an IRS audit. But Trump gave it a try anyway. We don't actually know if it worked, because Trump will not disclose any of his tax returns, not even from the 1990s. But the fact that Trump would even try to stretch the law to save paying any taxes tells us something about the man who has now admitted to paying no federal income taxes for years.
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    Yes, I know full well that "tax" has largely been replaced by another three letter word ending in "x" as a campaign issue. But voters should take note. The facts as we have them strongly suggest that Trump used and lost other people's money -- lots of it -- to get out of paying massive amounts of income tax to the government for himself. Trump clearly did not use his huge tax savings to give much to charity.
    In sum, Trump has spent a lifetime using and losing other people's money in order to help one person: Donald Trump. Caveat emptor, as they say.