The New York Times tells us that Jared Kushner paid "little to no" income tax from 2009 to 2016. Yes, Kushner is very rich. But not paying income tax is actually pretty reasonable given that on the numbers presented, Kushner has been making a loss. We tend to try to tax positive incomes, not negative ones. That’s not how it’s presented by the New York Times, but it is the crux of the matter.
The details are here. The Guardian reliably supplies the outrage here. I'll explain what they don’t: On the numbers presented it’s quite right, at least in the economic sense, that Kushner isn’t paying income tax since he’s making that loss.
That crux of the matter is something that every homeowner understands — buildings eventually fall over. It’s necessary to repair this and that on an ongoing basis. Every so many years, some major expenditure is required: a new roof maybe, new windows, redo the air conditioning perhaps, or the heating boiler. It’s obvious from hard experience that we’ve got to do this.
Pretend you’re in business, that you own real estate and rent it out for a living. These costs, they’re part of the costs of being in business just as much as the food bill for a restaurant is. We obviously take the maintenance costs off gross revenue, just as we do the meat suppliers’, before we try to calculate the profit being made. It’s that profit that we want to tax, of course; we don’t tax on a revenue basis but on the profit.
Maintenance costs are thus obviously deductible. And yet, there's more than this. Buildings are, eventually, replaced. That means any one building declines in value each year as it comes closer to that replacement date. This is depreciation. Just as a business buys a machine, that machine will decline in value over its useful life.
Which is exactly what Kushner is accused of doing. The only trick here is that much real estate business is conducted through partnerships, not corporations. Thus, the tax bills arrive with the individual investors, not the corporation itself. That’s why this depreciation allowance appears on his personal income tax return.
This depreciation is larger than his income in the years mentioned. Therefore, the tax allowance is higher than any tax owed — zero income tax bill. We can also describe the same thing another way. Kushner is consuming his capital. Those buildings are worth less each year; on a full set of accounts, he’s making a loss.
No, we can’t go around shouting that real estate rises in value, for two reasons. One is that capital gains is different from income tax and this is about the second, not the first. The other is that there’s a crucial point being missed. Real estate doesn’t go up in value — the land it stands upon or the permission to build might, but the buildings don’t.
The tax deduction also doesn’t apply to the land. From the New York Times: “The losses were driven by depreciation, a tax benefit that lets real estate investors deduct a portion of the cost of their buildings from their taxable income every year.” Yes, quite so, but note the detail they give on another page: “Under the federal tax code, real estate investors can write off the purchase price of the building — excluding the cost of the land — over a period of decades.”
You don’t get depreciation on the land, only on the building. Leave the land value aside, as that’s taxed differently and elsewhere in time. It’s righteous that there is such depreciation simply because the building itself does decline in value. Other than in exceptional circumstances (say, the White House), we do indeed rip buildings down every 50 or 100 years, clear the lot, and build anew. Any new building is declining in value by 1-2 percent a year. Any tax system will, and every tax system does, include such depreciation in its calculations. Simply because it exists as a reality, whatever the implications, we do at least try to base the tax system upon that real world outside that depreciating window frame.
Maybe the rate is the right rate; perhaps it’s a little odd to see this depreciation on a personal income tax form. But the economic equivalent is going to exist simply because that economic reality does.
And why did Kushner pay no tax? As the example given to us says, he got $1.7 million in direct income and at the same time lost $8.3 million as the buildings fell in value. That’s a loss, and we tend not to pay taxes upon losses, only upon profits from businesses.
Yes, details matter. But given that Kushner was making an economic loss, why should he be paying income tax?
Tim Worstall (@worstall) is a contributor to the Washington Examiner's Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.