The American Tax System: A Brief Explainer

Since someone leaked one of Donald Trump's income taxes (or that of his organization), I've seen a lot of shit reporting on the matter. Of course most of that MSM "journalism" is really an extension of the Clinton campaign and so they benefit from further misleading the public. So in the interest of education this post will explain how the US tax system works in it's most general form.

I used to have a business. It fails. Most businesses fail. Most fail shortly after starting. While I had it I learned eye opening things about this corporation called The United States.

1) Individuals pay taxes on income BEFORE expenses. Businesses pay taxes on income AFTER expenses.

This one difference explains the vast majority of why Trump (or his organization) did not pay taxes in that year (and others) that the nearly $1 billion was lost. You see, if Trump was simply an individual who messed around and got himself into $1 billion in debt, the IRS would say "well sucks to be you but you made 30K and you owe us 12% of that."

I just threw that 12% out there. The point is that Trump would have had to pay taxes on any income he made while he was piling up that debt because individuals pay taxes BEFORE expenses. However; since Trump Inc. is a business. Trump gets to tell the IRS: "Yeah I had 200 million in income this year, but since I lost the Casino, Airline and the cost of getting the Hotel, I'm actually 900 million in the hole. Sorry."

The IRS would have no choice but to say:"Oh damn, that sucks. See you next year."

And don't get it twisted, This applies to EVERY business regardless of size. You have a loss that is greater than your income? You don't pay taxes. This is one reason why entrepreneurship is a positive.

2) If you have a corp. IT makes money not YOU.

This is another item that many people fail to understand. WHen you have a business your clients don't pay YOU they pay your business. At it's extreme if you never took a paycheck from your business and your business made $100,000. It is your BUSINESS that owes taxes, not you. Many smart business people use this fact and pay themselves a small fraction of their businesses income. They keep their income low to avoid relatively high personal tax liabilities. You as an individual cannot do this. Well actually if you have a 401K or related investment you are doing the exact same thing. Sheltering income and avoiding tax payment.

The next thing you do is you put anything you have to pay for in the business name. YOU don't buy a car, the BUSINESS buys a car. YOU don't buy a suit, your BUSINESS buys a suit. Etc. Etc. if you work it legally a lot of items you would be using for personal use becomes a business expense and therefore a tax write off.

I know people who go out to dinner with friends and they take about 5-10 minutes of the 2 hour dinner to discuss "business" and due to tax rules THAT dinner has now become a business dinner and therefore a tax deduction. This is one reason why business people like to "do lunch" and the like. All perfectly legal. You may not like it, but I always say why are you hating the player? Why not play the game?

Lastly, people need to understand that just because a particular business doesn't pay any income taxes, it doesn't mean that the state doesn't benefit from the existence of that company. There is a reason why many stats give companies multi-year "no taxes" guarantees (which I personally don't care for but that's another topic for another time). Companies that are not sole proprietorships tend to employ people. And what was the number one point made above? Individuals pay taxes before expenses. Employees are "expenses" of a business (cost of labour). The state makes money of the money businesses pay to employees (which is also why automation is also a large threat to state and federal tax revenue).

I'm not saying the tax code is perfect, but the media frenzy about Trump "avoiding taxes" as if he wouldn't have preferred to have $1 billion more in revenue makes no sense. So the fact is Trump paid what he owed: Nothing. And if YOU even had the assets to have that kind of loss you'd do the same thing. Don't be mad 'cause you're relatively broke. 'Cause it's not his fault.