Originally published on Forbes.com.

The part of last night’s debate that impressed me the most besides Trump’s “bad hombres” line was not the discussion of the candidate’s tax plans, which like most of the debates generated more heat than light. What intrigued me was the discussion of Trump’s own taxes, with Hillary Clinton leading off with:

But what is really troubling is that we learned in the last debate he has not paid a penny in federal income tax. And we were talking about immigrants a few minutes ago, Chris. You know, half of all immigrants — undocumented immigrants in our country — actually pay federal income tax. So we have undocumented immigrants in America who are paying more federal income tax than a billionaire. I find that just astonishing.

Trump responded with:

So let me just tell you very quickly, we’re entitled because of the laws that people like her passed to take massive amounts of depreciation on other charges, and we do it. And all of her donors — just about all of them — I know Buffett took hundreds of millions of dollars, Soros, George Soros, took hundreds of millions of dollars…

Skipping over some interplay we also have from Trump:

And you know, Hillary, what you should have done, you should have changed the law when you were a United States senator… because your donors and your special interests are doing the same thing as I do, except even more so… You should have changed the law. But you won’t change the law, because you take in so much money. I mean, I sat in my apartment today on a very beautiful hotel down the street known as Trump… (CLINTON: Made with Chinese steel.) But I will tell you,  I sat there watching ad after ad after ad, false ad. All paid for by your friends on Wall Street that gave so much money because they know you’re going to protect them. And, frankly, you should have changed the laws

 

Trump Wins The Personal Tax Round – The Only One I Scored

I was watching the debate at the Unitarian Universalist Church of Worcester. Not exactly Trump country, but I didn’t get much of a reaction when I called out that he kind of had something there.

The subtlest point is that Clinton’s statement that we “learned” in the last debate that Trump has not paid a penny in federal income tax is based on very little information and a lot of speculation.  What we learned from the New York Times, actually, was that in 1995 Trump had a personal net operating loss of over $900 million, which Clinton rounded up to a billion.  Translating that into no income tax for the next two decades is a bit of a leap.

Oddly enough Trump did not deny the claim.  So I think I have to give Clinton a point there.

Nonetheless, I think that overall Trump wins the portion of the debate concerning his own tax issues, at least in my mind.  There is of course the Learned Hand rule.

Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.

A highly leveraged real estate operator, who manages to keep upping the ante, might not have much in the way of realized income while building substantial net worth from unrealized appreciation.  The key element is not so much the depreciation deduction as it is the unrealized appreciation that will allow you to keep refinancing and buying more property.

This road to wealth is pretty wide open, as you might learn from watching late-night TV or maybe from attending Trump University.  The thing is the no money down art of the deal type of courses downplay the amount of work involved.  And the risk.  A really smart guy I know once observed “Leverage makes whatever is going to happen, happen faster.”

Do Clinton Supporters Do What Trump Did?

Assuming that Trump managed to pay no taxes for the last couple of decades, the only part of the Clinton tax proposals that might have caused him trouble along the way is a limit on the amount of gain that can be deferred in a like-kind exchange.

But  I think the answer is a qualified yes.  First of all the benefit that neither of the major parties considers – unrealized appreciation – is one of the keys to Buffett’s high net worth.  Jill Stein and the Green Party would get at that through a wealth tax, but that is a proposal not ready for prime time.

The Charge That Trump Loves

Then there is depreciation, the charge that Trump says that he loves.  If you look into the black box that contains almost all of Buffett’s wealth and, I should disclose, a good bit of mine, you will find that Berkshire Hathaway has a liability of over $63 billion in deferred income taxes.  Those are taxes booked to income tax expense that reduce reported income but not yet reported on income tax returns.

More than half of Berkshire Hathaway’s deferred taxes are the result of tax depreciation being greater than book depreciation.  In 2015, Berkshire Hathaway recorded income tax expense of $10.5 billion on pretax income of $34.9 billion.  The total amount actually paid was $4.5 billion.  The primary reason for the difference was the depreciation difference.

Now the depreciation thing does turn around on you.  On any individual asset, there has to come a time when tax depreciation is lower than book depreciation.  But year in and year out, at least on a dollar basis, Berkshire Hathaway places more property and equipment in service than it retires, so the deferred tax account continues to grow.

So Trump does have a point.  Maybe not much of a point, but still a point. Since there is nothing else in the debates that is in my lane as we say, and this might seem a pro-Trump piece, I suppose I should lay out where I stand.

My Bottom Line

I’m not real enthused about either candidate.  I have this tendency to evaluate them as if they were involved in public accounting because over three decades at something will tend to affect your worldview.

The only two roles I could see for Trump in public accounting are client from hell or managing partner. Public accounting firms at the regional and large local level tend to be run by somewhat sociopathic dictators of greater or lesser benevolence.  Hillary Clinton on the other hand could be the leader of a peer review team or one of the people in a national firm that has a job not involving direct client service coming up with nonproductive things for working people to do.  Clinton is definitely the Big Four type.  Trump not so much.

Much as I like the local regional scene and fit in as well there as I could fit in anywhere, enterprises of a large scale, like the government of the United States of America probably require more of the Big Four type, much as I hate to admit it. I actually kind of like guys like Trump, although somebody should have told him that things became different after the Clarence Thomas hearings.  Trump as President really scares me though, so I’ll have to go with the Big 4 type.