The mysteries of Donald Trump's taxes -- how taxpayers subsidize his billionaire lifestyle

One of the more delicious moments of this wacky Republican primary season occurred late last month when former Republican presidential nominee Willard “Mitt” Romney attacked Donald Trump for not releasing his taxes, and warned that they likely contain some kind of “bombshell” revelation.

You'll recall that during the 2012 election, Romney kept his own taxes under wraps for as long as possible, and when he finally released a summary it showed that he'd actually paid excess taxes for the previous year – he'd sent the IRS a bigger check than he had to – in order to show an effective tax rate over 10 or 11 percent. At the time,  analysts confidently predicted that after the election, Romney would file an amended return and get those extra bucks back from Uncle Sam.

But even if Romney isn't the best messenger for this line of attack, he was almost certainly onto something. We can't know for sure what Trump might be hiding, but if anyone is in a position to offer an informed theory, it's David Cay Johnston. Johnston won a Pulitzer Prize working the tax beat for the New York Times and authored the seminal book, Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super-Rich–and Cheat Everybody Else. He appeared on Politics and Reality Radio this week. Here's a transcript of our conversation that's been edited for length and clarity.

Joshua Holland: David, do you think it's likely that he's really been audited for the past twelve years? Should we buy that?

David Cay Johnston: Well we have no way of knowing, but remember that Trump has many entities. If any of those got audited Trump would, of course, claim that he was being audited. But if you get audited year after year after year by the IRS it suggests that they're finding serious problems and that's why they keep coming back at you.

JH: The most comical thing in this entire election season was probably Trump suggesting that the audits are a form or religious persecution – that he's being persecuted for his Christianity. That's just hilarious.

DCJ:     Well, we all know that Donald Trump is one of the most pious people in America. To compare any of us to his level of piety... And of course, with the Kenyan-born Muslim terrorist in the White House, of course Mr. Trump is being persecuted for being such a pious man.

JH: You think the real bombshell is that he's probably making a lot of money and reporting negative income. How would that work?

DCJ: His biggest write-off would be depreciation of real estate. Most Americans can only deduct $25,000 of depreciation. If you have a job that pays $75,000 and you're a landlord on the side,  you can only take $25,000 to offset your paycheck, no matter how much value your property loses to depreciation. But Congress enacted this special rule in the 1990s that says if you're a full-time real estate person -- and “full-time” in this case is 15 hours a week -- then you can take unlimited deductions as your property depreciates.

And then he's probably writing off his luxurious lifestyle as a business expense. You're not allowed to take personal expenses against your taxes. But Trump almost certainly set it up so his 757 jet is owned by one of his businesses. He certainly has a letter from his security adviser that says that it's not safe for him to travel commercially because he might be kidnapped or attacked. That allows him to use the jet for personal use and pay nothing for it except the taxes on the value. The taxes on a round-trip flight to Paris would come to less than $900, even though he's flying in his own personal 757 jet. He undoubtedly doesn't go anywhere without it being a business expense.

In all likelihood, his whole lifestyle is funded like that. I'm sure that he is able to charge a lot of his luxurious lifestyle to the tax system.

JH: And by "to the tax system," you mean to me and to you. Right?

DCJ: Oh, it means you and I are subsidizing him. Absolutely.

JH: We're subsidizing this rich guy.

DCJ: That's right.

JH: But it goes beyond not paying taxes. He probably profits from the tax system, right?

DCJ: People need to understand that very wealthy people don't just avoid paying taxes. For people like Donald Trump and Mitt Romney, the income tax is a source of wealth. The rest of us are burdened by it, but they get rich off it.

Let's say Trump deferred the taxes on a year of his salary from “The Apprentice.”  That is effectively a zero-interest loan. Trump claimed he got $65 million per year from “The Apprentice,” which anybody who knows anything about television knows is absurd. And NBC said publicly that it was absurd. But let's assume he made $65 million.

The federal income tax on that year's salary would have been about $23 million. Trump says he's a world-class investor, so let's assume he nets 10 percent per year on the $23 million he didn't pay. At the end of 20 years, he could then pay the $23 million in deferred taxes, which has been eroded by inflation, and he would pocket the gains from investing that money for all those years. That works out to $130 million he would have made by deferring his taxes. This is one reason why the super-rich are getting super-richer -- the tax system takes from you and me and gives to them.

JH: What are some of the other things that might be lurking in his taxes?

DCJ: Donald has long, deep mob connections. One of the charges that sent Fat Tony Salerno, the number one mobster in America, to prison involved doing business with Donald Trump. If we had Trump's tax returns we'd have detailed knowledge of the entities -- the partnerships and trusts – that he's dealing with. From there, public disclosure records could lead us to other people who are involved with these businesses, and we would see whether he continues to be involved with the Mafia. We know that he was, until very recently, very involved with a Russian mobster and scam artist. I'm confident that if we had his full tax returns, we would find out a lot about Donald's connections to people who are criminals or who behave in atrocious ways.

Also, Trump claims to be a great philanthropist. But if you have zero income on your tax return -- or negative income – then giving to charity has no value to you. Trump hasn't donated a penny to The Donald J. Trump Foundation since 2006, and most of the money that's in the foundation came from vendors and business partners. Their donations were really a form of kickback. A legal form of kickback, but a kickback nonetheless.

JH: David, I want to ask you to take a look at the big picture. Four years ago we had a national discussion about how the über-wealthy make money from the tax system in the context of Mitt Romney. Now we're talking about Trump. Maybe we'll talk about it in the context of the Clintons. What is the larger dynamic that people need to understand about this?

DCJ: Well they need to pay attention to how the system really works. Unfortunately, most of the people you see on TV and politicians, whatever they tell you about the tax system is only occasionally, and incidentally, related to reality. The tax system in this country is damaging the country, but the solution is not lower tax rates; that's just more giveaways for people at the top. The solution is we need an entirely new federal tax code. We have in America a great federal tax system...for 1960. But we don't live in that world anymore. We live in a totally different economy where wealth and the flows of capital are very different than they were in the 1960s. We are now moving from an industrial society to a digital society. That requires a new tax system. History shows that if you don't modify your tax system to keep up with economic changes, you eventually destroy your society.

You can listen to the entire 16-minute interview with David Cay Johnston below. You can also subscribe to the show at iTunes or Podbean.