Transcript - Remarks: Donald Trump Testimony to Congress - November 21, 1991 | Factba.se

Frank Guarini

00:00:00 - 00:00:10 (10 sec)

I would like to call our next witness, Donald Trump, who certainly needs no introduction. Your fame and reputation precede you, Donald.

Donald Trump

00:00:10 - 00:00:10 (0 sec)

Frank Guarini

00:00:10 - 00:00:49 (39 sec)

We are very happy to have you here. We know you to be very frank and outspoken, and you have had extensive experience, not only in large real estate developments, but also in the sports, gaming, and entertainment industries. I am glad you were able to be here this morning and appreciate your waiting and being so patient as you have been. So we welcome you, especially, to listen and to learn from your experiences as we know you have been very much involved in regard to this credit crunch that we have before our Nation today. So you may proceed

Donald Trump

00:00:49 - 00:01:48 (59 sec)

Thank you very much, sir. Well, first of all, I think I could say to Mr. Seidman, who I believe has done a really fantastic job while he was in government, that had the 1986 catastrophe of the Tax Reform Act not been passed, I am not sure that you would know Mr. Seidman in the capacity of RTC. You would know him in perhaps some more positive capacity, but not in the Resolution Trust. And I think in bringing that point up to Mr. Seidman before he tended to agree with me, I think? Seidman Yes.

Donald Trump

00:01:48 - 00:07:07 (319 sec)

Good. So this taxability was just an absolute catastrophe for the country, for the real estate industry, and I really hope that something can be done, as Congressman Thomas recently said, that something can be done to change at least parts of it, because it has taken all incentive away from investing in real estate, and real estate really means so many jobs. I mean you have a city called New York City, you have a city called Boston, you have other cities and so many other cities. But I can tell you from very personal knowledge, New York City has virtually no construction right now. We are not only talking about office buildings, of which there are many, we are talking about housing, moderate-income housing, low-income housing, even highincome housing where you create jobs, you create so many other things. They buy carpet. They buy furniture. They buy refrigerators. They buy other things that fuel the economy. And incentive has to be put back into the construction of things that are needed, such as housing of all kinds. I heard this morning that we have had the lowest number of houses built in terms of housing since 1946 or 1947, and that is not much of a tribute to this group of folks that are representing the country, unfortunately. I feel very badly about it. Everybody feels very badly about it. The fact is that the one word that nobody up on the panel has mentioned is the word depression, and I truly feel that this count right now is in a depression. It is not a recession. People arW kidding themselves if they think it is a recession. You look at what is happening in the automobile business, in the retailing business. The retailing business in any part of the country virtually is a total disaster. But the real estate business, we are in an absolute depression. And one of the reasons we are there is what happened in 1986-in addition to what Mr. Seidman said, is what happened in 1986 with the changes. So I really came on the basis that I wanted to-I will answer questions on it, but I wanted to discuss the Tax Act of 1986. Active, assive, you are absolutely right, 100 percent right, and something as to be done. It has to be brought back. It has to be reformed. It has to be taken care of. I think for certain types of building, such as housing, depreciation schedules should be very severely limited, cut, so that people have incentive to build housing as opposed to commercial, which really again, the commercial is probably taken care of for a long while. The reason is, however, unfortunately, is the fact that the economy is so bad that there is no reason for the commercial. And I think that gets taken care of and gobbled up very quickly, if the economy improved. One of the big things that we don't have today that we used to have and that was a very good thing for real estate and that is the whole world of syndication and investment. And if you are a dentist and you are making $200,000 or $300,000 a year, and you can't invest now in real estate-the reason the stock market is artificially high, in my opinion, is that there is no other form of investment. I mean, you can't put it into real estate and you can't put it into bonds, so people are putting it into the stock market. All the companies in the stock market are doing lousy, but their stock is high. I think what we have is when the stock market goes down by, let's say, 1,000 points in two days, which perhaps it might, then we are in a full-scale depression, then everybody admits it. Then the politicians admit it. The President is going to admit it. Everybody is going to admit it. And right now the only thing that sort of keeps the word depression off their lips is the fact that we really have a 3,000 stock market, and people are surprised to see it, because the companies certainly aren't doing very well within the market itself. But the syndication of real estate was a very positive thing. And you can't syndicate, you can't have people putting up equity. That would take a lot of the strain off the banks, if people could put up equity in the form of equity money for syndication where you used to be able to go out and syndicate a piece of real estate. Today, you can't. A lot of the strain that we are talking about, liquidity crisis, a lot of the strain comes off the banks, and I think it could really open up a whole new market. And the other thing is, frankly, by having cut the high income tax rates to 25 percent, as an example, people don't have the incentive anymore to invest. They are saying, why should I take a chance on investing in low or moderate income housing? I might as well just pay the tax. But the fact is that 25 percent for high-income people-for highincome people, it should be raised substantially with the understanding that, if you invest, you can get it down and down substantially below that number. The incentive was taken away when the tax rates came down for high-income people. And I say leave the middle, leave the low, lower them. But peopl

Frank Guarini

00:07:07 - 00:07:27 (20 sec)

Well, let me ask you, If Congress does nothing, doesn't take any course of action whatsoever, how long do you think it would take our country to climb out of the economic crisis that it is in today?

Donald Trump

00:07:27 - 00:09:15 (108 sec)

Well, I think if incentives aren't given through taxing and others means, I believe that this country could be in this deep recession/depression for years. For years. I see no-no sign of any kind of an upturn at all. There is no incentive to do anything. There is no incentive to invest. Everyone is doing badly, everyone. The wealthiest people are doing badly. Poor people are doing badly. Everybody is doing badly. I mean, you walk around the cities today, very, very few are doing well. And unless the incentive is given back to this country, and it has been taken away with 1986, unless it is given back, I really think you could-there is an expression that we are using, survive until 1995. I think it is maybe longer than that. Survive until 1995. I think we are being generous. It is really, really bad, and you folks are going to have to do something to fix it and to get people moving.

Frank Guarini

00:09:15 - 00:09:47 (32 sec)

How did we get here as we are? Has it been the mountain of debt that has been created in the public and private sector? Has it been the generosity, as Mr. Seidman said, of our tax laws, allowing interest payments to be deducted, so that it encourages a debt-driven economy?

Donald Trump

00:09:47 - 00:12:14 (147 sec)

Well, I think we got here by the fact that at the time certain things were dono, I-can speak in terms of the real estate business, certain deals were made, predicated on a certain tax policy, and then that tax policy was changed. I mean, I truly believe that you wouldn't have had the savings and loan crisis-I mean you save minutia compared to the money that you have wasted on bailing out the savings and loans. Now, if your insurance companies are in deep trouble, and I think they are going to get much worse because some-much of their portfolio is in real estate, and I think you better save the real estate now. I can tell you, I bought things that were great deals in the middle 1980's and even the later 1980's, but when that tax law kicked in, you know, really kicked in, all of a sudden, those deals which were good economic deals were no longer good economic deals, because they changed the game on me, and they changed the game on everybody else. And it is pretty unfair. You make a deal predicated on a certain tax law, and then they change the rules. So a lot of the problems that you have experienced are because of the fact that some very foolish people, in order to save a small amount of money because they heard the word tax shelter, and they thought the word tax shelter was a bad thing as opposed to saying it is an investment in real estate-I mean, an investment in low income housing they call a tax shelter. And the word tax shelter is like the word junk bond. It is very bad-sounding word, even though it isn't necessarily a bad thing. So they heard the word tax shelter, and, politically, they didn't like that word, and they said let's get rid of tax shelters. When they got rid of tax shelters, they got rid of people investing in low and moderate income housing and lots of other good things. And I think you are going to have to go back. They could have corrected 1982, the law, 1982. They could have corrected it, gotten rid of the abuse and had a great situation today. You wouldn't have had the savings and loans problems. I don't think you would have had many of the banking problems. You wouldn't have had what is going to befall you now, I think. I think the insurance companies are going to be in very deep trouble because of the values of their real estate have been eroded because of what Congress has done. So you have some very deep problems that can be corrected fairly simply by putting the incentives back.

Frank Guarini

00:12:14 - 00:12:45 (31 sec)

Real estate has always been one of America's favorite industries. The Tax Code has long favored real estate to a great extent because the industry employs so many people and is so important for the welfare of our economy. In 1981, we became very generous with real estate. We cut depreciation schedules in half. We gave tax credits. Would you say that this is where we started to go wrong? Is that where the beginning of building shopping centers and commercial buildings that were not filled?

Donald Trump

00:12:45 - 00:13:01 (16 sec)

I think that is where you started to go right, but maybe there was an excess. I think if it was channeled more toward the housing, which has always been-I mean there has never been enough housing. You need it desperately, and I am talking all forms of housing. You need it desperately.

Frank Guarini

00:13:01 - 00:13:03 (2 sec)

Including low-income housing?

Donald Trump

00:13:03 - 00:13:39 (36 sec)

Including low-income housing, absolutely, and including senior citizen housing and dormitory housing and other forms of housing. There has never been-it is an insatiable thing, and you could really get that going. But what you are also getting going is jobs. Because I tell you what-New York unemployment and other cities' unemployment is astronomical. I think it is much higher than the numbers are indicating. I just don't think it has been reflected yet. If you look at what is going to happen with the construction industry within the next few years, forget it. There is not going to be anybody working. So I really think you need that for a lot of reasons, but also to spur jobs.

Frank Guarini

00:13:39 - 00:14:31 (52 sec)

Passive losses, one thing that many people draw attention to, as Mr. Seidman did. Members of this committee did, when we passed it, and we had no hearings to my knowledge on it. It happened almost overnight, and it was a surprise, so that it was never given the full thought and attention it should have had before we made such a bold and important move. There is a bill now that Mike Andrews has with several hundred, I understand, cosponsors that hasn't moved through the Ways and Means Committee yet. It says that developers should, if their fulltime occupation is real estate development, be excluded from the passive law rules law. I assume you agree with this, and I am wondering whether or not you think it should even go beyond real estate developers.

Donald Trump

00:14:31 - 00:14:55 (24 sec)

I think it has to go beyond developers because we are going to get a lot of the liquidity from people outside that are making money and can invest in real estate. Right now they can't. As far as the passive laws, I did hear something about-in 1986passive laws, but nobody ever thought it would be possible for something like this to get passed. And all of a sudden it is passed, and everybody, including the U.S. Government, is left holding the bag, and a lot of other governments, by the way.

Frank Guarini

00:14:55 - 00:15:08 (13 sec)

And now it is very difficult to get rid of,because of the revenue loss that would ensue. The marginal rates of our income tax would have to go up so high. The passive loss deduction was eliminated so that they could bring the marginal rates down.

Donald Trump

00:15:08 - 00:15:24 (16 sec)

I don't think they would go up. I think you would end up bringing much more money into the system so that you may look at a specific list. But I think the the incentives and everything else would bring so much money into the system that the numbers-and everybody that says that would just be far, far better than anybody really understands or knows.

Frank Guarini

00:15:24 - 00:16:06 (42 sec)

Hopefully, we can cure these excesses. Just let me, lastly, turn to capital gains. President Kennedy brought our capital gains tax down to 20 percent. Now, of course, it seems to be a bad word in certain corners of Capitol Hill. Would you say that we should go back to the traditional type of capital gains where all kinds of equities in real estate be given the normal deduction that we had pre-1986, or should we just target our capital gains to capital ventures, to resources that we need to have particular growth in?

Donald Trump

00:16:06 - 00:16:23 (17 sec)

I think it could be targeted, but I think that capital gains is important, and I think real estate in particular in this country really needs help, because it is such a dominant force. It just gets everything else going. And if you can get real estate going, if you can get construction going in the country, I think that is the way you get out of the recession or depression.

Frank Guarini

00:16:23 - 00:16:29 (6 sec)

And for savings, super-IRAs like Senator Bentsen has over in the Senate side, you are for that?

Donald Trump

00:16:29 - 00:16:30 (1 sec)

Frank Guarini

00:16:30 - 00:16:32 (2 sec)

Thank you very much, Mr. Trump.

Donald Trump

00:16:32 - 00:16:32 (0 sec)

Frank Guarini

00:16:32 - 00:16:34 (2 sec)

Hal Rogers

00:16:34 - 00:16:38 (4 sec)

Thank you, Mr. Chairman, and thanks for being here, Mr. Trump.

Donald Trump

00:16:38 - 00:16:39 (1 sec)

Hal Rogers

00:16:39 - 00:16:58 (19 sec)

What would prevent-if we restored the loss provision of the 1986 Act, what would prevent excesses under a reinstated passive loss provision that led to over commercial building previous to 1986?

Donald Trump

00:16:58 - 00:17:37 (39 sec)

Well, I think one thing that could be done is you could re-examine this over the years, so that if in 2 or 3 or 4 years you saw a great deal of housing, and I think that would be unlikely, because it does seem to be insatiable, but if you saw, and I hope ou have this problem, frankly, but if you saw so much housing eing created by the reinstatement or the cessation, I think that you could probably take another look at it and maybe terminate it at that point for the future. 48-881 0 92 2 But I just feel that you really-I mean that that was a tremendously negative provision, and it really hurt this country. It truly hurt the country.

Hal Rogers

00:17:37 - 00:17:41 (4 sec)

Would you limit its reinstatement to residential properties?

Donald Trump

00:17:41 - 00:18:58 (77 sec)

Well, it just seems that that is what is really needed now. I mean everyone agrees that you need housing, and you probably always will need vast amounts of housing, so it seems that that is what is needed. But you have to understand, when the economy comes up, you know, these buildings, many of the buildings built right now, when they were built it seemed like a good idea by a lot of people, a lot of honest people. The banks that loaned the money weren't all bad. And what happened to a lot of people is that the economy went bad. Now everyody says, how could they have built this much space. But the fact is, this space, if the economy had stayed like it was in 1986 and 1985, that space would have been gobbled up, and they would have been building more, and everybody would be happy right now. The economy went very, very bad. You look at various cities, they are cutting back on space. I am seeing things where they had less space this year than they had two years ago. It is unheard of statistics. So nobody could have predicted what was going to happen with the economy. So it would be nice to have it across the board. It would be nice to say that the banking system and various other controls will take care, but you, certainly, at a minimum, you should have it for the housing industry, in my opinion.

Hal Rogers

00:18:58 - 00:19:25 (27 sec)

Mr. Seidman seemed to say, and he is behind you and can correct me if I am misstating his testimony, or part of it, he, in essence, said that a recovery in the overall economy is the only way.to cure the real estate problem. You seem to say that the reinstatement of the passive loss provision of 1986 TEFRA would lead us out of the recession.

Donald Trump

00:19:25 - 00:20:42 (77 sec)

No, I am not saying that alone. I am agreeing with Mr. Seidman, except I will take the word only out. I think that the Government can do quite a bit also, including the shortening of depreciation schedules, power to syndicate, the right to syndicate, which also hes to do with the active passive if we were able to syndicate development or able to syndicate even buildings that are built and successful and good that you can't get a mortgage on. I mean, I have a friend, he has got a building with an IBM Triple Net lease, he can't get a mortgage on the building. And it is a perfect1 beautiful, nice little building with IBM as a tenant, and he can t get a mortgage because it is real estate, because the banks are allowed a certain amount of real estate. And they want to cut down on the real estate. So even a good loan like that, they don't want to put it, because they don't want to be associated this year for real estate. This is a bad year. Hopefully, in 2 years from now everyone is going to want real estate. It runs in cycles. But you really can do things other than just economy, I mean I think you can-I would like to say that you can spur the economy through taxes so that the economy actually gets good.

Hal Rogers

00:20:42 - 00:21:18 (36 sec)

Now, we are operating under the Budget Act, the budget agreement, which has a paygo provision, pay as you go. If you reduce taxes, you got to make up the revenue somewhere else, so that we have a revenue neutral action. Are you saying that if we reinstate the passive loss provision, we are going to have some lost revenues because of that? Am I hearing you say that you would increase the income tax rates of the higherincome people?

Donald Trump

00:21:18 - 00:22:14 (56 sec)

Well, I would do that. Yes, sir. I would do that because I believe strongly that people don't have enough incentive to invest right now at 25 percent. I just don't believe they have enough incentive to take the risk of investment with recapture and all of the other problems of investing in real estate and other things. And I would absolutely do that with the understanding that, if they do make the investments, they can go down to the minimum level. And I feel very strongly about that. As far as the $5 billion that we are talking about, that $5 billion in loss of taxes may contribute $100 billion because of the incentives that it gives. See, I don't look at that as a loss in taxes. I think that so much work could bcreated by getting rid of that horror show that you may take in a hundred billion. Now an accountant will tell you, well, we are going to lose $5 billion. But in actuality it could spur hundreds of billons of dollars worth of work.

Hal Rogers

00:22:14 - 00:22:18 (4 sec)

I thank you for your testimony. You have been very helpful.

Frank Guarini

00:22:18 - 00:22:19 (1 sec)

Jerry Huckaby

00:22:19 - 00:23:40 (81 sec)

Thank you, Mr. Chairman. Mr. Trump, you mentioned the Soviet Union and no incentives there. You know, for the last 45 years we have been engaged in cold war with the Russians. Clearly, I think a year ago it became apparent that we had won that war. We spent tremendous dollars in the 1980's, as did the Russians in the military buildup. It broke their system, in my opinion, left us with a big debt. But, clearly, we are the surviving superpower today. And here we find ourselves taking a microlook at this economy. Inflation is very low, running around 3 percent, interest rates, lower than they have been in 19 years. No shortage of food, no shortage of oil, but things that have put us in recessions in our lifetime. And you seem to be saying, and I believe I agree with you, that you can trace this recession totally to the 1986 Tax Act and the devastating effect it had on real estate. But yet, prior to 1986, the tax laws were so generous that it seems to me that an awful lot of building was being driven by the Tax Code rather than a demand. What is your comment on this?

Donald Trump

00:23:40 - 00:25:16 (96 sec)

I agree with that, and I agree that there was abuse, and there were openings in that law which could have easily been stopped and that could have been corrected. But what they did is they took an overall picture of the entire tax-with the new Tax Reform Act of 1986-and they totally destroyed the incentive that was proper in 1981. There were a lot of Mr.TRUMP. Thank you, sir. good things in 1981, and there were some bad ones, and the bad things should have been corrected. But they could have been corrected without having destroyed all of the incentive. For instance, we have had recessions before during my lifetime, which is now getting a little bit older and older, but in 1975 we had a recession, but that was a picnic compared to this. That was an absolute picnic. That was a question of some liquidity, some of this, some of that. Nobody knows when this is going to end. You know, you saw some smiles, when do you think it is going to end? Nobody has the faintest idea. There is absolutely no hope, insight, unless something is done by the government to spur the economy, because the economy is not going to spur itself. V. HUCKABY. I think all of the Members here have seemed to imply that they favor the changes in the passive losses. You mentioned a change in depreciation schedules, I guess reverting back to accelerated depreciation. I think that was one of the areas, looking back in the past, that was perhaps of greatest abuses where one could recover their entire investment, perhaps 3 years as a result of tax writeoffs. Which of these areas do you think would be more important?

Donald Trump

00:25:16 - 00:25:39 (23 sec)

Well, I think the accelerated depreciation and the shortening of schedules is very important in terms of getting something done. And, again, we really need something going now. You can come back in 2 or 3 years, if it starts moving, and you can terminate that. But you have to get something going. If it is not started soon, we are just going to be in a free-for-all.

Jerry Huckaby

00:25:39 - 00:26:17 (38 sec)

I agree with you that there is probably an infinite demand for housing out there and that we certainly should change our tax laws to encourage investment there, from low-income housing all the way up the scale. But you have suggested a new twist here that is necessary to raise the top tax bracket from the 31 to 33 percent up to 40 or 50 percent, and in order to encourage people to invest in these areas. Is that really correct? If we had the passive losses and the accelerated depreciation and one could anticipate future increases in the value, do you think it is necessary to increase the tax rate?

Donald Trump

00:26:17 - 00:27:14 (57 sec)

I think it would be a big help for the upper-income taxpayer to have incentive rather than paying taxes to invest. I think that the accelerated depreciation, depreciation schedules being shortened, would be a tremendous help for the obvious reason, that you would be able to get, assuming the active passive and assuming the right to syndicate, you would be able to get investors to come into real estate transactions. And I am not talking about only new building. I am talking about existing. Because you have existing buildings with mortgages on them where the mortgages are coming due, and there is no bank in the world-I am talking good buildings that are making money-there is no bank in the world that will give you refinancin you could bring in equity money through syndication, that would be a great thing, that would be a really great thing, because you would open up the liquidity of the system so that banks can loan not only to real estate but to other things. If you brought in noninterest-bearing equity, that would be a tremendously positive boost for the economy. ,

Jerry Huckaby

00:27:14 - 00:27:20 (6 sec)

How high do you think you would have to take the top tax brackets in order to make this happrr.2?

Donald Trump

00:27:20 - 00:27:49 (29 sec)

The higher it is, the more incentive there would be. I guess it was 50 and 60 at one point, and it ,. s, obviously, even higher than that. But the higher it is, the more incentive. I don't mean middle income or low income. Anybody that could stay the same would be lowered. I am talking about the people that are making a great deal of money should have an incentive to invest, and I know it was 50, and I am talking about a substantial increase, with the ability to get it down to the minimum number.

Jerry Huckaby

00:27:49 - 00:27:51 (2 sec)

All right. Thank you.

Donald Trump

00:27:51 - 00:27:55 (4 sec)

Create a lot of jobs. Mr. Guarini Mr. Thomas.

Hal Thomas

00:27:55 - 00:27:59 (4 sec)

Thank you, Mr. Chairman. It is a pleasure to meet you, Mr. Trump.

Donald Trump

00:27:59 - 00:28:02 (3 sec)

Nice meeting you, sir.

Hal Thomas

00:28:02 - 00:28:53 (51 sec)

I have never really heard you in terms of your professional expertise, I have only read about you in terms of other activities, and I have to say that I admire you in terms of your professional expertise. I have been fighting the 1986 tax bill ever since it was passed. I think there were three really pernicious provisions along with all of the other onerous ones. We have been talking about one in particular, changing of the rules, and I will spend some time talking about passive loss in a minute. The second one that we haven't dwelt on was the change which almost invited, literally invited, the American homeowner to exchange equity for debt, because we removed the tax deductibility of consumer debt, and then changed the rules to allow them to squander the equity in their homes.

Donald Trump

00:28:53 - 00:28:53 (0 sec)

Hal Thomas

00:28:53 - 00:30:22 (89 sec)

And then, thirdly, a point that Mr. Seidman mentioned, that most people don't realize, was the retroactive aspect of that bill, where many people had made decisions about pensions and their retirement tied to real estate in which the Government changed the rules after the fact. You could not believe the decision that the Government made prospectively and, I think, psychologically that significantly damaged us. In terms of passive loss, I know there are a lot of people watching who don't really understand-what we are talking about. We are talking about the rules under which people make decisions to invest their money. There is no question that there were tax strategies built into the code that allowed people to take advantage of so-called shelters. We have talked about the excesses of the early 1980's. The cry for 1986 was, don't let the Tax Code dictate economic behavior. But I think you have quite rightly pointed out that one of the reasons the stock market is overly priced is that, because of the Tax Code, that is the only game in town, that we are dictating economic behavior today. The loss of equity in terms of the homeowner is the Tax Code structure. We are continuing to dictate economic behavior. And I think the thing you have to understand, which I 34 know you appreciate, is that the Tax Code is going to dictate economic behavior. There is no way for it not to, if you have a Tax Code.

Donald Trump

00:30:22 - 00:30:22 (0 sec)

Hal Thomas

00:30:22 - 00:33:44 (202 sec)

And what you have asked for is the Tax Code to create incentives for behavior. I agree with you. The problem is, I think people are overstating the correction necessary for passive loss changes. The bill that I originally sponsored and that I agreed to join in a cosponsor shi with Mike Andrews of has been honed down to only cost about $2.8 billion over 5 problem with the passive loss rules changes, as you well was not just to get rid of tax shelters. That is people who were not materially participating in real estate, like the dentists and the doctors that you have suggested would reinvest, were investing for purposes of tax shelters. There is nothing wrong with allowing them to invest if they believe they can earn an economic gain. You don't have to tilt the Tax Code in their direction if there is an opportunity to make money in the real estate area. The problem with the passive loss rules changes was that people who were literally actively involved in real estate aren't allowed to take losses against their activities. And we railed long and hard-the Chairman is not here-behind closed doors in the committee, whether this provision was put in the bill. It was an attempt by people who did not understand the real world to take an academic definition and stick it into the Tax Code. We have lived under this academic definition, I think, far too long, and I really appreciate your real-world plea that we make the kinds of adjustments that won't lead us to the overexcesses of the early 1980's but will allow those who want to participate and to create an active real estate market to be able to do so. One last comment on depreciation. You need to know that the requirement under the 1986 tax bill was that it be revenue neutral, that we make these multi-billion dollar adjustments within the Tax Code, but that we come out even dollars. The depreciation schedule was literally an accordion that was squeezed or stretched to produce the dollar numbers necessary to make the package revenue neutral. It was not designed to create an honest return on investment in the real world. It was a political gimmick to fill revenue gaps. And I just, I just want to thank you. You have had to live with it. I think the American people have had to live with it far too long. We aren't talking about recreating 60 or 70 percent tax levels to fund a passive loss change. I agree with you. If people are going to have their money eaten up by the Tax Code, they are going to look for ways to invest and make money; incentives need to be built in, they don't need to be built that high. We could use some of that money to adjust the schedule so we don't create a massive tax loss. Your reaction?

Donald Trump

00:33:44 - 00:33:50 (6 sec)

I agree with you 100 percent.

Hal Thomas

00:33:50 - 00:35:14 (84 sec)

We have over 300 Members who have co-sponsored our passive loss legislation. It is not on the front burner in terms of tax changes. Texas years. The know, What is being contemplated by the committee are political responses of adjustments within brackets to create a, quote, unquote, tax break for the middle class, and if you would urge people who are in the private sector to contact the Chairman of the Ways and Means Committee, Dan Rostenkowski, contact myself-for $3 to $5 billion, I can think of no better immediate shot in the arm for our recovery. It is an enormous advantage, and I agree totally with you, that when you try to construct a model that says it will lose $3 billion to $5 billion in the Tax Code, yes, because we will change definitions in the code. But what we also change is behavior. When that behavior exhibits itself in the real estate market, I also agree with you, there will be billions of dollars of exchange, of circular flow of economic activity, of jobs, and there will be no loss of revenue to the government.

Donald Trump

00:35:14 - 00:35:16 (2 sec)

You are absolutely right.

Hal Thomas

00:35:16 - 00:35:41 (25 sec)

I wish I had a lot of questions for you. You already said everything for me that needed to be said. I just wanted to put it in the context of where we are; a relatively simple change to correct a serious error in the 1986 tax bill could go a long way structural, but I think also psychologically to indicate we are doing something, we do understand the problem, and we are responding.

Donald Trump

00:35:41 - 00:36:16 (35 sec)

Thank you, Congressman. It is a shame, Congressman, that this very powerful and important industry doesn't have a better lobby, because I watch legislation being lobbied that should never be passed, and it gets passed; and I look at things like this, and as you say, it is on the back burner. And you know how important it is, and the real estate industry is a group of thousands of people, some wealthy, some not wealthy, most not wealthy right now. And I tell you they have absolutely the most pathetic lobby in the history of the U.S. Congress. It is so bad, and I don't know how many of these people behind me are lobbyist, but they are not doing a very good job, I can tell you that.

Hal Thomas

00:36:16 - 00:36:27 (11 sec)

I was just telling the gentleman that if he would appear before the committee, or several others like him, we wouldn't need lobbyists.

Frank Guarini

00:36:27 - 00:36:39 (12 sec)

The name of the game in Washington is to have an effective lobby, and then you get the laws passed that need to get passed for that particular industry. Mr. John Spratt?

John Spratt

00:36:39 - 00:37:12 (33 sec)

Thank you for your testimony. In the interests of time, I have but one question to you. Obviously, you operate on a scale vastly higher than I did when I was involved in real estate investment. When we syndicated a project, what drew the participants and limited partners to the syndication was not just the pass through of losses, but the fact that they could leverage their returns by writing off losses below the actual cash investment. Do you think that is a good rule and should continue?

Donald Trump

00:37:12 - 00:38:01 (49 sec)

I think it is a rule that works in terms of getting people started, and it certainly had an effect, and it can be limited to an extent if need be, but right now we don't need limits, we need action. If there is no action we are not going to have a real estate industry. I am really talking, to a large extent, because we talked about overbuilding done during the 1980's, but I am really talking about things that are existing, not just for new construction, but things that are existing, because you cannot get financing for any building, now matter how good it is or how good your tenant is, you cannot get financing for it under any circumstances, anybody. If it has real estate associated with, it can you not get financing. And that is a pretty pathetic situation. Maybe that changes, but I think you people are going to be the ones that have to make a change.

John Spratt

00:38:01 - 00:38:09 (8 sec)

The point was, when you described the syndication, you were talking about nearly an all-equity syndication, and I rarely saw an all-equity syndication.

Donald Trump

00:38:09 - 00:38:51 (42 sec)

I am sorry. I meant there would be a mortgage and a certain amount of debt and there may be 20 or 25 percent of debt infusion. You would have a lower rate of mortgage and 25 percent of essentially interest-free equity. That is a real positive. The bank could make up the other 75 percent, or again, it varies. You could have from 50 to almost a 100 percent, but you could have a large amount of equity infusion, and I think that is a real positive thing. But right now, under the existing laws, you can't do that.

John Spratt

00:38:51 - 00:39:10 (19 sec)

I have got developer clients who still survived, they think this has been a shakeout and the fit have survived. They look back on the period from 1981 to 1986 who say there are a lot of characters in business who shouldn't have been. They had no economic reality. Would you agree with that assessment?

Donald Trump

00:39:10 - 00:39:24 (14 sec)

I would partially. I think there were a lot of good people in the market who got whacked and a lot of bad people who deserved to get whacked.

Frank Guarini

00:39:24 - 00:39:27 (3 sec)

Thank you. Mrs. Bentley.

Helen Bentley

00:39:27 - 00:39:56 (29 sec)

Thank you, Mr. Chairman. Mr. Trump, I want to thank you for being here today and for your stand on American manufacturing over the years. I was one of those with Mr. Thomas who early on when the 1986 Tax Act~was under consideration, opposed it. In fact, I described it as, it stinks

Donald Trump

00:39:56 - 00:39:57 (1 sec)

Helen Bentley

00:39:57 - 00:40:48 (51 sec)

It eliminated interest deductions on the purchase of items. And we have a little bank in my area which just this past week has reduced by 1 percent the interest on anybody who wants to buy an American car. The number of phone calls that that bank had had since that ad was put in has been phenomenal. What do you think would happen if efforts were made to push manufacturing upward and which then would help your real estate, et cetera, if we would give some inducements to investment tax credits on American manufactured products?

Donald Trump

00:40:48 - 00:40:54 (6 sec)

I think it is a truly spectacular idea.

Helen Bentley

00:40:54 - 00:41:01 (7 sec)

Are you going to join me, Mr. Thomas?

Frank Guarini

00:41:01 - 00:41:06 (5 sec)

I already have a bill in for tax credits, so I agree with you.

Helen Bentley

00:41:06 - 00:41:42 (36 sec)

Very good. I need to persuade some of my good Republicans to agree with me on that, too. But I think what one of our problems has been that we talk far too much about free trade instead of fair trade. And as a result, we are all suffering from the negative effects of such free trade. I think some of those behind you are some of the people who have been hurt from the result of one-way free trade, that of exporting jobs overseas. Again, Mr. Trump, thank you for being here today. * I would some day like to pursue your thoughts on manufacturing further.

Donald Trump

00:41:42 - 00:41:45 (3 sec)

Thank you, ma'am.

Frank Guarini

00:41:45 - 00:41:47 (2 sec)

Thank you, Helen. Jim Hayes?

Jim Hayes

00:41:47 - 00:42:36 (49 sec)

Thank you, Mr. Trump. I want to take this opportunity to perhaps outline things in a way that might seem sohomoric, but realizing this is an opportunity because of someone with your high profile, to have people who do not deal with financial markets to understand some of the dilemmas we find ourselves in and some of the ways we get out of it. Explain in very simple terms how, an developer, such as yourself, with an idea for a project takes the cost of the project prior to 1986-.-and the impact of that act, takes that project cost, proposes a financing mechanism, and goes about getting investors. Just briefly outline anything, whether it is commercial or residential real estate.

Donald Trump

00:42:36 - 00:43:28 (52 sec)

That could be a pretty long answer, but just briefly, you conceive of a development on a site. It usually starts with a piece of land. You conceive of this, you go and get your zoning or you have your zoning, you get your architects, your engineers, your planners, you design something you think is going to be nice and economic and all of the things it is supposed to be. You then go out Andget your financing. Ideally, you used to go out and get your financing. Today you don't even think about it. You then go out and get your financing, you build your job, hopefully have your success. You have created a lot of jobs for people that are buying lots of things for their families, including other homes, et cetera, et cetera. That really is the process, but that process is now circumvented because it is impossible to get financing for any development in this country, I would say, right now.

Jim Hayes

00:43:28 - 00:44:13 (45 sec)

Explain to them also that at the end of the trail, when you have an interim lender, someone who gave you a construction loan, and a permanent lender who looked at the project long term, that projects that you did prior to 1986 that were either in the stage of an interim lender or had been completed, that even -though those had been completed and conceived under tax laws that then allowed for depreciation, that it would appear that the loan was economically viable by a loan officer who looked at it, it made sense to them. Explain how even though it was done under previous rules, the subsequent rules were applied to you and the kind of economic impact they had for a completed transaction.

Donald Trump

00:44:13 - 00:45:41 (88 sec)

They weren't grandfathered, essentially. You bring up a great point. Because I have never understood how this is possible. I have never understood how somebody throughout this country didn't sue the United States Government and have that overturned. You bhd people, investors, investing over a 10-year period for a set of-under a set of conditions, and this is, as I was talking about, playing the game. We are all playing by a certain set of rules. The rules were changed for the Government but not for us. It was an incredible circumstance that happened. People went bust by the hundreds of thousands. I hope you weren t one of them in terms of that, but obviously you know people who were, they changed the rules on taxes. And you have some incredible situations. People guaranteed personally a stream of payments paid over a 10-year period for perhaps a very good job, like a low income housing development. Nothing wrong with. That is a very positive thing. And after 2 years they got wiped out on the taxes, yet they still owed all of this money, and all of these people had to declare bankruptcy, they couldn't pay it. How it wasn't grandfathered for those people, I have never understood. How it wasn't overturned by the courts-and I am sure many people must have brought lawsuits-is just beyond me, because it is probably the most unfair thing I have seen in terms of business and government. Great point.

Jim Hayes

00:45:41 - 00:46:51 (70 sec)

And another point, I will be specific and use an office building that I am familiar with, unfortunately, but to make the point with the change in configuration of interest deductions. There was a building in my home town that generated $242,000 in rentals. It had been done through a partnership, not a leverage deal, fully collateralized, 100 percent occupied, not outside investors, only two partners, but because of the change in the 1986 code-the building was completed prior to the 1986 code-the $246,000 was treated all as personal income to the taxpayer, but the interest deduction to the insurance company that financed it was allowed only at $10,000. Whereas the actual economic activity was a slight gain of 10 to $10,000 between rent and debt service. But the tax impact of $240,000, with only a $10,000 deduction, gave an income tax bill of $60,000 or $70,000. And that is what took them down, not a dishonesty, not a deduction, not a building that fell down or one that wasn't occupied.

Donald Trump

00:46:51 - 00:46:59 (8 sec)

He did a beautiful job. They did everything right, and they got wiped out.

Jim Hayes

00:46:59 - 00:47:29 (30 sec)

That would explain your previous comment about good buildings that had good tenants but lenders don't want them for two reasons. One is because of uncertainty, since people who did good planning and fair planning got killed retroactively, they are not trusting of a government that might not, in search of revenues, do something in addition, even on new buildings coming in, because the rules apply retroactively.

Donald Trump

00:47:29 - 00:47:31 (2 sec)

Absolutely correct.

Jim Hayes

00:47:31 - 00:48:15 (44 sec)

And secondly, because it doesn't have a collateral value under that circumstance, since it is uncertainty. I will make three points. One is, at no cost to taxpayers. If we do some of the things you have outlined, collateral value will be improved. If a bank is carrying a building such as the one I have described, whether it is interim or permanent, if it is set at a value of $1 million, because of current tax law, if tax law were changed, that building alone might be $3 billion or $4 billion, which on their collateral carried by the bank gives them less pressure from regulators, because asset values would increase, but it doesn't cost the taxpayer or revenue payer one cent.

Donald Trump

00:48:15 - 00:48:44 (29 sec)

You might even make aprofit on RTC after all. You could probably take RTC and end up starting to make some real sales instead of taking away for 5 cents on the dollar. You are selling property that is much better than that. If you made the proper changes in the tax law

Jim Hayes

00:48:44 - 00:49:24 (40 sec)

Secondly, I represent people who are being foreclosed on, who never missed a payment. They have made every monthly payment through other income and this were able to do so, but because the collateral value was depressed, even though they never missed bank payments, those loans are being called because the regulatory scheme is saying, this property is worthless, therefore we are demanding $3 million or $4 million in additional collateral they don't have. And they are being placed either into bankruptcy or tremendous economic adversity, having never missed one monthly or one quarterly payment.

Donald Trump

00:49:24 - 00:49:33 (9 sec)

It is a very unfair circumstance. There are hundreds of thousands-and I guess beyond that-people exactly in that circumstance.

Jim Hayes

00:49:33 - 00:50:15 (42 sec)

And the second point is on property tax. If we keep current law, we are just not having enough years passed where corporations and individuals are recognizing that if their property is lower because of changes in the tax code, they should go to their assessors, because it lowers the tax receipts and makes them suddenly have to come up with alternative tax packages for their own revenue measures. Is that not--in New York, for example, are there not people trying to get property tax adjusted automatically because of the impact on real estate ventures?

Donald Trump

00:50:15 - 00:50:17 (2 sec)

There are indeed.

Jim Hayes

00:50:17 - 00:50:50 (33 sec)

On economic activity-I come from southwest Louisiana which people refer to as oil and gas community. I used to hear people say constantly we were recession-proof, which I thought was an interesting phrase. I used to hear constantly, I am not in the oil and gas business." Well

Donald Trump

00:50:50 - 00:50:52 (2 sec)

Jim Hayes

00:50:52 - 00:52:00 (68 sec)

I am not in the real estate business can't be said, because it is such a large segment that fuels the economy. If you are a shop owner, if you are in medical practice, if you are an attorney, you are in the real estate business, because if your community asn't collapsed, as mine did, it didn't just take down real estate developers, it took down everyone. Three out of four of the kids that go out with graduate degrees from my university leave the State for employment. They didn't have the oil and gas industry either. They weren't realtors, but they can't stay and get a job. For those who think it goes away cyclically, my community has been in the grips of a deep depression for 9 years. It doesn't have a term limitation on depression, and we had better have an affirmative action from Congress or I guarantee you there is no guarantee that New York City won't have 9 years or 19 years or that we will ever turn it around. I would ask if you wouldn't agree with that, and then I will be quiet and hope this time I haven t been too strident.

Donald Trump

00:52:00 - 00:52:05 (5 sec)

Beautifully said. I agree 100 percent.

Frank Guarini

00:52:05 - 00:52:25 (20 sec)

I thank the gentleman from Louisiana for the many suggestions he made. Perhaps you would be a great candidate for the Ways and Means Committee. With regard to nonperforming loans, the value to loan ratio should be changed, and many people get trapped because of the banking regulations. They are unfair and unjust. Mr. Thomas.

Hal Thomas

00:52:25 - 00:53:01 (36 sec)

Just briefly, a question, Mr. Trump. We have all been wringing our hands about the RTC and the property it has on hand and the inability to move it, taking 5 cents on the dollar. As an investor, what would your opinion be of the Congress making those kinds of changes in the tax code, as you have indicated, passive loss, modified depreciation, and so on, and having the RTC simply batch properties on the basis of some criteria, chronological listing or whatever, some good with the bad, and put them out there, and see what would happen in terms of the market? I think you would move a lot of property that way.

Donald Trump

00:53:01 - 00:53:10 (9 sec)

I agree. I think you should make the changes. You shouldn't sell another property. You should make the changes and then sell the property, and then you would get money like you wouldn't believe.

Hal Thomas

00:53:10 - 00:53:14 (4 sec)

Batch them and let the private sector sort it out.

Donald Trump

00:53:14 - 00:53:24 (10 sec)

I agree with what you just said. But I think you should stop selling property until such time as you straighten out the tax code, because properties are being sold at an artificially low rate because of the tax code.

Frank Guarini

00:53:24 - 00:54:23 (59 sec)

Donald, the real estate industry is 20 percent of our GNP, employs 8 million people, and I understand, according to a statement you filed contributes $200 billion in tax revenues that's realized nationally. You have spoken up for a very important sector of our economy, and the sector that took the biggest hit in the Tax Reform of 1986, and there are a number of corrections that should be made for the sake of the growth of our economy. Otherwise, it will be too late if we don't move soon. I want to thank you for your insights. I thank you for being here. I hope sometime soon we will have the advantage of your thoughts and your suggestions and your contributions before the Ways and Means Committee, because I think some of the tax suggestions you make have a great deal of validity to them, so I thank you for the hour or so you have spent with us and I wish you well on your way back to New York.

Donald Trump

00:54:23 - 00:54:26 (3 sec)

Thank you very much. Thank you all. Thanks.

Frank Guarini

00:54:26 - 00:54:27 (1 sec)