Republican Party Presidential candidate Donald Trump took a tax loss of more than $900 million in 1995.  This would seem to allow Trump to pay vastly reduced, or no, income taxes in the ensuing several years.  Democrats are all up in arms over that, and how unfair it is, and how Trump must be dishonest to do such a thing.

Never mind that it’s all perfectly legal.  Never mind that Trump has said that illustrates the byzantine nature of our tax code—and that he agrees it’s unfair, because most folks don’t have the ability to generate those losses or carry them forward into succeeding years to reduce those years’ income tax liabilities, and that our tax code ought to be simplified to make it fairer.  Never mind that he (as he’ll happily and enthusiastically tell you) is ideally positioned to do that tax code reform because he’s a skilled user of the tax laws.

What is it, then, that Trump was able to do?  It’s centered on a tax reduction device called “net operating loss carry-over,” which in very general terms allows a taxpayer’s business losses to be carried backward in time for two years, so a taxpayer can file amended returns to reduce his tax liability (and likely get refunds) for those two prior years and/or to be carried forward into future years (lots of them, today) to reduce tax liability on income generated or expected to be generated in those future years (the tax planning gets complex, which is part of the “unfairness” of this aspect: it takes money to afford the tax experts that can help with this planning).

This NOL loophole in our income tax code is almost as old as our income tax itself: the Revenue Act of 1918 created the concept.  The purpose was, ostensibly, to let businesses smooth out spikes in their incomes and losses in particular years so as to both weather general economic downturns better and to do more efficient planning for future years: planning for product development, sales and expenses predictions, and the like.  That’s one kicker, and I’ll come back to it.

Another kicker centers on the folks most likely actually to be able to use such a loophole:

Cyclical businesses that can suffer heavy losses in downturns, such as consumer-goods makers. Owners of real-estate investment firms, with big interest and depreciation deductions, also can benefit. Other rules benefit real-estate investors such as Donald Trump, including the ability to use losses to offset other kinds of income.

Which is why most folks don’t have the ability to generate those losses and then to carry them forward.

The losses don’t even have to be “real” losses, either.  Some taxpayers are able to structure their activities so as to generate paper losses while taking in actual dollars.  Many of these schemes are fraudulent, but many can be structured perfectly legally under our byzantine tax code.

Now to those two kickers.

With a simplified tax code, this sort of thing would be vastly reduced.  With lower rates—a critical part of simplifying our tax code—the value of doing such a thing would go down greatly: with less money being lost to taxes in the first place, there’s less incentive for a taxpayer to go to lengths to protect his money from taxes.  Eliminating income taxes on businesses altogether—individual citizens wind up paying a very large fraction of the business’ taxes anyway through higher prices—would eliminate altogether the need to do things like NOL adjustments to tax liability.  Everyone would be treated substantially the same by our tax code, with differences centering only on actual income.

And: businesses wouldn’t need to incur expenses anticipating the future as it relates to tax planning; they could, instead, spend their resources on planning for product development, sales and expenses predictions, and the like.  Businesses could make their decisions based on business imperatives rather than on tax incentives.