Why seeing Trump’s tax returns really matters

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• JUDY WOODRUFF:

  Now what we know about Donald Trump's taxes, what we don't know, and how his real estate business could be affecting his tax bill.

  That subject led to one of the more memorable exchanges of this week's presidential debate.

  Our economics correspondent, Paul Solman, sat down with a Pulitzer-Prize winning investigative journalist, David Cay Johnston, who's been reporting on Trump since the late '80s. He's also the author of a bestselling book, "The Making of Donald Trump."

  It's part of our weekly series Making Sense.

• PAUL SOLMAN:

  David Cay Johnston, welcome.

  DAVID CAY JOHNSTON, Author, "The Making of Donald Trump": Thank you, Paul.

• PAUL SOLMAN:

  Let's begin with Secretary Clinton's claim that Mr. Trump pays no federal income taxes, and, in the debate, his response.

  HILLARY CLINTON (D), Presidential Nominee: Maybe he doesn't want the American people, all of you watching tonight, to know that he's paid nothing in federal taxes, because the only years that anybody's ever seen were a couple of years when he had to turn them over to state authorities when he was trying to get a casino license, and they showed he didn't pay any federal income tax.

  DONALD TRUMP (R), Presidential Nominee: That makes me smart.

• HILLARY CLINTON:

  So, if he's paid…

• PAUL SOLMAN:

  The media are making a big fuss about that offhand remark of Mr. Trump's, but isn't he right to say he's smart to pay no taxes?

• DAVID CAY JOHNSTON:

  Well, there are two issues here to separate.

  And one of them is, because he is a — the owner of a lot of real estate that he manages, he may well pay no income taxes. We know for a fact that he didn't pay any income taxes in 1978, 1979, 1984, 1992 and 1994. We know because of the reports of the New Jersey Casino Control Commission. We don't know about any year after that.

• PAUL SOLMAN:

  But that's because he's depreciating the properties, right, while, in fact, they're increasing in value.

  But I depreciate the home office in my house. I work there. I don't have another office. It's just not much of a benefit for me, obviously.

• DAVID CAY JOHNSTON:

  Most Americans cannot save more than $6,000 a year from depreciating real estate. That's all they can write off against their salary or business profits.

• PAUL SOLMAN:

  Well, I don't come close to $6,000.

• DAVID CAY JOHNSTON:

  But people like Trump can take all the money that's made from a TV show, from selling neckties made in China, running golf courses, and wipe out that income for tax purposes with depreciation. Only a narrow segment of people qualify for this.

• PAUL SOLMAN:

  And how does he qualify?

• DAVID CAY JOHNSTON:

  Because he spends at least 15 hours a week managing real estate that he owns. That's the rule.

  If you're a full-time manager of your own property — and full-time, according to Congress, is 15 hours a week — you can take unlimited depreciation and use it to offset your income from other areas and pay little in tax.

  Years ago, one of the biggest real estate tax lawyers in New York said to me, if you're a major real estate family and you're paying income taxes, you should sue your tax lawyer for malpractice.

• PAUL SOLMAN:

  Well, but then he's just doing what everybody else does.

• DAVID CAY JOHNSTON:

  That's right.

  Congress has all sorts of rules, Paul, that certain people, hedge fund managers, private equity managers, executives, movie stars, fall into that allow them to escape or defer into the future not paying their taxes. And if you can defer your tax into the future, it's the best deal in the world, because you don't just get to eat your cake and have it too. You get to eat your cake and have a bigger cake.

• PAUL SOLMAN:

  But you mean you get to keep the money…

• DAVID CAY JOHNSTON:

  Right.

• PAUL SOLMAN:

  … that you would otherwise have had to pay in taxes.

• DAVID CAY JOHNSTON:

  That's right.

• PAUL SOLMAN:

  You then invest that money.

• DAVID CAY JOHNSTON:

  Correct. And in the future, you pay taxes.

  And I will give you the example I have used with Donald Trump. If he really made $65 million a year for his television show, which NBC says is absurd, but let's assume he did.

• PAUL SOLMAN:

  But he says that.

• DAVID CAY JOHNSTON:

  He says that.

  And he would have paid about $23 million in federal income tax. If he's able to wipe that out by depreciating the various buildings that he owns, he would keep the $23 million. Now, the normal rules say he has 20 years. So let's assume he keeps it 20 years, and he earns a net of 10 percent a year.

  And, after all, he's Donald Trump, who says he's a great investor. At the end of the 20 years, Trump would give the government the $23 million, which is worth a lot less because of inflation, and he would pocket, after tax, $130 million.

• PAUL SOLMAN:

  That's the $23 million at 10 percent a year.

• DAVID CAY JOHNSTON:

  For all those years, that's the interest on it.

  And I don't think most Americans understand that, for certain very wealthy people, our federal income tax system is a subsidy system that makes them richer.

• PAUL SOLMAN:

  But you can't blame Mr. Trump for taking advantage of the system.

• DAVID CAY JOHNSTON:

  I agree. I do not blame him one bit. But that's only part one of it.

  The second part is the 1984 tax trials, when he appealed his New York state and New York City audits, were about Donald claiming zero revenue for his consulting business and taking over $600,000 of deductions, for which he couldn't produce any documentation, no receipts, no checks, nothing.

  When shown a tax return that Donald Trump had been audited on — he appealed the audits — his tax guy said, well, that's my signature, but I didn't prepare that.

  In fact, it was a photocopy. No one could find the original. Now, those two elements, zero income and huge deductions, combined with his own tax guy testifying under oath, that's my signature, but I didn't prepare that tax return, those are very strong badges of fraud.

  And seen in the context of Trump having committed sales tax fraud in the past, which is indisputable, I think that it's reasonable for the American public to ask, did you go beyond what's lawful, maybe scandalously lawful, but lawful, and violate the law?

• PAUL SOLMAN:

  Sales tax fraud?

• DAVID CAY JOHNSTON:

  Well, Donald participated in something known as the empty box scam.

  He bought $65,000 worth of jewelry from Bulgari across the street from Trump Tower, and had the record show that it was mailed to him in an out-of-state address. Now, if you're not a New York resident, you may not have to pay sales tax if the jewelry is mailed to you in another state. The problem is, they were empty boxes. It was proven.

• PAUL SOLMAN:

  Was he convicted?

• DAVID CAY JOHNSTON:

  No.

  Instead, the attorney general of New York prosecuted the store manager and one of the Italian owners of the store. And that led Mayor Ed Koch to say, the customers who took part in this fraud, they should serve 15 days in jail. They're really the criminals here, not the store.

• PAUL SOLMAN:

  But he didn't serve any time.

• DAVID CAY JOHNSTON:

  No. And he wasn't charged in the case either.

• PAUL SOLMAN:

  Well, so, then, why are you making a big deal of it?

• DAVID CAY JOHNSTON:

  Lots of people commit crimes and don't get arrested. That's not the measure.

  The measure is, did you engage in unlawful conduct? Now, Joe Blow does this, we don't particularly care. But if you're going to be the president of the United States, we're reasonably going to put you under a microscope.

  And Donald Trump's tax behavior is absolutely important to understanding, is he qualified, is he morally fit, is he capable, is he trustworthy to have everything from the powers of federal law enforcement to the nuclear codes?

• PAUL SOLMAN:

  Peter Navarro, economic adviser to Mr. Trump, economist, University of California at Irvine, says, Mr. Trump should not release his income taxes, and here's why.

• PETER NAVARRO, Economic Advisor, Trump Campaign:

  It gives the opposition too much information. Why would you do that?

• PAUL SOLMAN:

  Because every other presidential candidate ever has.

• PETER NAVARRO:

  Ah, but here's the difference. He's self-funding his campaign. And if you release your tax returns when you're self-funding your campaign, you reveal to the opposition how much you have to run that campaign.

• DAVID CAY JOHNSTON:

  I think the reasonable response to this is, what are you hiding?

• DONALD TRUMP:

  Almost every lawyer says, you don't release your returns until the audit's complete. When the audit's complete, I will do it.

• DAVID CAY JOHNSTON:

  Let's take Trump at his word: I can't release the returns that are under audit.

  Well, let's have your returns from 1977 to 2008. The audits are closed on those. There's no excuse, by your own standard, not to release those returns.

• PAUL SOLMAN:

  Why do you care so much about this?

• DAVID CAY JOHNSTON:

  Because I want to make sure that the American public knows who this man is.

  I met Donald Trump in June of 1988, when I went to Atlantic City to cover the casino industry. And so my standard here is, you should know these facts. And the minute you know, and you still want to vote for someone, you should go ahead and vote for them. But don't later say, I had no idea.

• PAUL SOLMAN:

  David Cay Johnston, thank you very much.

• DAVID CAY JOHNSTON:

  Thank you, Paul.

• JUDY WOODRUFF:

  The IRS says nothing prevents Trump from sharing his tax information even if he is being audited.

  For his part, Trump told Bill O'Reilly on FOX News Channel last night that he didn't admit at the debate that he doesn't pay federal taxes. But he also didn't confirm that he does pay such taxes.