TaxProf Blog

Editor: Paul L. Caron
Pepperdine University School of Law

A Member of the Law Professor Blogs Network

Saturday, August 11, 2012

NY Times: Tax Returns of Richest 400 Americans Provide Clues to Romney's Unreleased Tax Returns

New York Times:  In Superrich, Clues to What Might Be in Romney’s Returns, by James B. Stewart:

On the face of it, Senator Harry Reid’s explosive but flimsily sourced claim that Mitt Romney paid no income tax seems preposterous. Mr. Romney has denied it, and without his returns no one can say for sure. But for someone who makes millions of dollars a year, would it even be possible?

Evidently it is.

It so happens that this summer the IRS released data from the 400 individual income tax returns reporting the highest AGI. This elite ultrarich group earned on average $202 million in 2009, the latest year available. And buried in the data is the startling disclosure that six of the 400 paid no federal income tax.

The IRS has never before disclosed that last fact.

Not even Mr. Romney, with reported 2010 income of $21.7 million, qualifies for membership in this select group of 400. But the data provides a window into the financial lives and tax rates of the superrich. ... And that data demonstrates that many of the ultrarich can and do reduce their tax liability to very low levels, even zero. Besides the six who paid no federal income tax, the IRS reported that 27 paid from zero to 10% of their AGI and another 89 paid between 10 and 15%, which is close to the 13.9% rate that Mr. Romney disclosed that he paid in 2010. (At the other end of the spectrum, 82 paid 30 to 35%. None paid more than 35%.) So more than a quarter of the people earning an average of over $200 million in 2009 paid less than 15% of their AGI in taxes.

How do they do it? ...Tax experts I consulted said these results almost certainly reflected aggressive use of tax-loss carry-forwards from 2008, since the stock market bottomed in March 2009 and rallied strongly during the rest of the year.

The superrich also accounted for a disproportionate amount of dividend income [and capital gains] ... taxed at a maximum rate of 15%, as opposed to the maximum rate on earned income of 35%, which helps explain why so many of the superrich pay a relatively low rate. Still, that preferential rate doesn’t get them anywhere near zero, or even 10%.

Edward Kleinbard, professor of law at the Gould School of Law at the University of Southern California, explained it this way, “You start with income dominated by tax-preferred income — capital gains and qualified dividends. That gets you to 15%. Then you use charitable contributions of appreciated securities to reduce ordinary income. But the charitable contribution deduction is capped at 50% of AGI. Now you’re way down, but you’re not at zero.”

What does it take to get to zero, or close to it? According to Professor Kleinbard, there are only two additional ways: tax loss carry-forwards to offset capital gains, and tax shelters, many of which have been deemed abusive by the IRS, to offset any remaining ordinary income after other deductions. ...

Since Mr. Romney seems to have had relatively little ordinary income since leaving Bain Capital, he may have been able to get to a very low rate in 2009 using tax loss carry-forwards from 2008 to offset capital gains and charitable contributions to offset up to 50% of his ordinary income. Without access to the returns, it’s impossible to know whether he would also have needed some additional form of tax shelter, aggressive or otherwise, to get even lower, or even to zero. ...

[E]ven Professor Kleinbard doubts that Mr. Romney paid no income tax. “It’s possible theoretically that Romney didn’t pay, but improbable,” he said. Far more likely is that he paid a very low rate that would generate renewed criticism. ...

There’s no reason to fault Mr. Romney for taking advantage of loopholes the tax code offers the superrich, however ill advised they may be as a matter of public policy. Mr. Romney didn’t make the law, and he’s called for broadening the tax base, which presumably means eliminating some of the breaks that benefited him. He could easily speak to that issue, since who would know better than he does which loopholes should be closed? ...

As long as Mr. Romney withholds his returns, continued speculation, and even outlandish conjecture, will probably flourish. “It’s reinforced my view that he’d be better off just releasing the returns rather than having people blindly speculating,” Leonard E. Burman, a tax specialist and professor of public affairs at the Maxwell School of Syracuse University, told me this week. “It seems like one of those slow-drip water torture things, and eventually he’s going to have to do it.” ...

What’s abundantly clear, both from Mr. Romney’s 2010 returns and from the returns of the top 400, is that at the very pinnacle of taxpayers, the United States has a regressive tax system. The top 400 earn more than 1% of all income in the United States, more than double their share in 1992. These 400 earned a total of $81 billion in 2009 — but paid an average tax rate of just 19.9%.

http://taxprof.typepad.com/taxprof_blog/2012/08/ny-times-irs-data-on-.html

Political News, Tax | Permalink

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341c4eab53ef0176172a18a1970c

Listed below are links to weblogs that reference NY Times: Tax Returns of Richest 400 Americans Provide Clues to Romney's Unreleased Tax Returns:

Comments

This is getting kinda old. What four-hundred people did on their tax returns has nothing to do with Romney's filings, either implied or statistically. The NYT could take examples of tax return fraud and claim that Romney might have done the same thing, but they "don't know." Next headline, "Romney may have wiped boogers on his tax returns, but we don't know."

Posted by: Woody | Aug 11, 2012 2:56:43 PM

"It so happens that this summer the IRS released data from the 400 individual income tax returns reporting the highest AGI."

Purely coincidental, I'm sure! Tricky Dick would be proud!

Posted by: Tex | Aug 11, 2012 8:01:21 PM

Professor Kleinbard actually teaches tax?
"What does it take to get to zero, or close to it? According to Professor Kleinbard, there are only two additional ways: tax loss carry-forwards to offset capital gains, and tax shelters, many of which have been deemed abusive by the IRS, to offset any remaining ordinary income after other deductions. ..."

1) Those are the only two ways possible? I can only assume he has allowed partisianship get in the way of clear thinking. Off the top of my head I am guessing if most or all of the income is earned in a foreign country the foreign tax credit could subtantially lower the rate paid to the US. I am certain there are many scenarios other than the evil abusive tax shelter.
2) Some tax shelters have been deemed abusive by the IRS. The reader to the Times reads this and is lead to assume any type of write off is bad, evil and abusive. This article leaves me dumbfounded.

Posted by: Dave | Aug 14, 2012 8:17:00 AM