Wednesday, September 11, 2013
Friday, May 3, 2013
Forbes: Pritzker Family Baggage: Tax Saving Offshore Trusts, by Janet Novack:
With President Barack Obams's nomination today of Chicago businesswoman and Forbes 400 member Penny Pritzker to be the Secretary of Commerce, her family’s legendary use of hundreds of offshore trusts to protect its wealth from taxes and the prying eyes of the IRS will be in the spotlight.
Or at least it will if Iowa Republican Senator Chuck Grassley has anything to say about it. In a memo to reporters Thursday afternoon, Grassley wrote: “Every nominee’s offshore tax avoidance activities should be examined as part of the nomination process. If the Commerce Committee doesn’t explore these questions with the nominee, I plan to do so, but I hope the committee will give the tax history a serious look.”
- The Atlantic, Penny Pritzker Is Obama's Mitt Romney
- Forbes, Pritzker vs Pritzker: One of the Sweetest Tax Deals Ever
- Politico, President Obama's Poke-in-the-Eye Picks
Sunday, April 28, 2013
Wednesday, April 17, 2013
Forbes: It's Time We Learned What Members of Congress Pay in Taxes, by Dorothy A. Brown (Emory):
On Friday President and Mrs. Obama released their most recent tax return for the entire world to see. They continued a longstanding tradition of sitting presidents releasing their returns, even though no law requires that they do so. The tradition began under the late President Richard Nixon. ...
Itemized deductions often come with a hefty price tag. The Joint Committee on Taxation has estimated that for 2013 the amount of revenue lost because of the three deductions the Obamas took (which happen to be among the most popular deductions taken) will be: $90 billion for mortgage interest, $47 billion for charitable contributions, and $46 billion for state and local income taxes. ... One part of the minority that benefits from itemized deductions is members of Congress.
Although Presidents have voluntarily released their tax returns for the last several decades, nothing could be further from the truth when it comes to members of Congress. McClatchy newspapers reported last July that of the 535 members asked to release their most recent tax returns, just 17 did. ... I suspect that if we looked at the tax returns of eavery member of Congress we would see something close to a 100% itemization rate. Compare that to only a third of the American public, and the numbers would suggest that repeal is the best way forward.
Given that I do not expect members of Congress to change their ways, one way to move closer to reform would be for the IRS to issue a new kind of report, which I call the “535 Report.” It would provide in summary fashion the information from the tax returns of all members of Congress. The 535 Report would be similar in concept to what the IRS currently produces for the tax returns of the 400 highest-income individuals.
No law is needed, because no privacy rights would be violated. All the IRS would have to do would be to crunch the numbers. Then we would know what percent of Congress itemized deductions and what the most popular deductions were. We could then compare the information with what the IRS already produces about the American taxpaying public in general, and hopefully encourage voters to demand change.
David Cay Johnston reported in The New York Times in June 2003 that the 400 report was begun in response to a professor asking for it. Let’s see if lightening can strike twice.
For more, see Dorothy Brown, The 535 Report: A Pathway to Fundamental Tax Reform, 40 Pepp. L. Rev. ___ (2013). For the video of Dorothy's presentation of the paper at the January 18, 2013 Pepperdine/Tax Analysts Symposium on Tax Advice for the Second Obama Administration, see iTunes and YouTube.
Monday, February 18, 2013
Inside Higher Ed: A Professor vs. Fox News:
Students in a political science class at West Liberty University were given an assignment recently to keep a "politics journal" in which they would record their reactions to various articles they had selected.
The instructor at the West Virginia public institution included some possible news sources, such as The Economist, BBC, CNN and The Huffington Post. But the instructor also specified that two sources could not be used. One was The Onion, which the assignment notes "is not news" and "is literally a parody."
The other barred source is the one that got the instructor -- Stephanie Wolfe -- scrutiny this week. She banned articles from Fox News, writing: "The tagline 'Fox News' makes me cringe. Please do not subject me to this biased news station. I would almost rather you print off an article from the Onion."
- Daily Caller, Professor Bans Fox News, Claiming It Makes Her Cringe
- Mediaite, Professor Bans Students From Using Fox News As A Source: It ‘Makes Me Cringe’
Wednesday, November 28, 2012
CampusReform.org: 96% of Political Donations From Ivy League Faculty & Staff Went for Obama:
From the eight elite schools, $1,211,267 was contributed to the Obama campaign, compared to the $114,166 given to Romney.
The highest percentage of Obama donors came from Brown and Princeton, with 99% of donations from faculty and staff going towards his campaign.
Dartmouth and Pennsylvania’s faculty contributed to the President’s campaign in the lowest numbers, with only 94% percent donating to the Obama campaign.
- Brown: 129 Obama donors gave $67,728, 1 Romney donor gave $500
- Columbia: 652 Obama donors gave $361,754, 21 Romney donors gave $34,250
- Cornell: 282 Obama donors gave $141,731, 11 Romney donors gave $8,610
- Dartmouth: 90 Obama donors gave $51,018, 6 Romney donors gave $2,850
- Harvard: 555 Obama donors gave $373,556, 30 Romney donors gave $34,500
- Princeton: 277 Obama donors gave $155,008, 4 Romney donors gave $1,901
- Pennsylvania: 376 Obama donors gave $209,839, 26 Romney donors gave $22,900
- Yale: 399 Obama donors gave $186,834, 13 Romney donors gave $8,655
Thursday, November 22, 2012
Within days of winning the election, President Obama announced that his victory gave him a mandate to raise taxes on the "rich."
Come again? This was a two-and-a-half-point election. It reflected a painfully divided electorate. The only mandate I saw was to unite a divided country.I voted for Obama. ... I did not vote for Obama because I think I am paying too little in taxes.
Like many people I know, I am "rich" by Obama's standards. I pay more taxes, percentage wise, than Mitt Romney and Warren Buffett, because I earn virtually every penny of my income.I work. And yes, all those deductions that allow the truly rich to not work, or at least to not work all the jobs I do, make me angry.
I am all for closing loopholes. I am all for ending deductions for things I don't even understand. But I am not for putting a low cap on deductions that would make it all but impossible for the charities I support to raise funds. I am not for putting a limit on the mortgage deduction that would mean, as a practical matter, that "middle class" (not rich) people in California would be priced out of the housing market, and the charities I support would not be able to raise what they need to survive.
And frankly, I don't think I'm alone. As a matter of fact, on this one, I don't think 51% of all Americans are to my "left" — if that's how you define the higher tax constituency.
Obama needs to be very careful. Yes, he was re-elected. But so were all those folks who blocked the extension of the Bush tax cuts if they excluded individuals and small businesses who make enough money to qualify as rich — but not enough to send their kids to college, or help their aging parents, or buy a home in a decent neighborhood.
We need to avoid going over the fiscal cliff. But Obama must also avoid the political cliff.
- Washington Post, Obama’s Class War Against His Supporters
Wednesday, November 7, 2012
Tuesday, November 6, 2012
Huffington Post: Mitt Romney Haunted by Missing Tax Returns as Campaign Draws to Close:
As the GOP presidential candidate faced pressure over the past year to release more financial information, it was widely presumed that at some point he would buckle and follow a tradition started by his father, who released 12 years of tax returns. People who knew him, however, warned that there was no chance he'd release the returns.
They were right. Mitt Romney made it. But the journey has left him broken and battered. ...
"Romney's refusal during his campaign to release his past tax returns betrayed a contempt for the electorate and for the democratic process, which relies on voters having the requisite information to make informed decisions," said University of Southern California law professor Ed Kleinbard. "The reason for the tradition of releasing past tax returns -- not returns prepared in the years an individual is running for the presidency -- is to demonstrate that the candidate fully and fairly complied with the tax laws when the spotlight of the election was not already on him." ...
Both Bain and Romney flirted with the edge of legality by using sham derivative transactions to mask investments in U.S. stocks, lowering their American tax burden. The IRS has been cracking down on this activity since 2010, as HuffPost reported in August. Thousands of pages of Bain documents released by Gawker also reveal that Bain gamed its management fees in order to help its investors avoid paying taxes –- a tactic that is straightforwardly illegal, according to Victor Fleisher, a tax expert and professor of law at the University of Colorado. ...
The sheer scope of Romney’s personal tax avoidance efforts also shed light on iniquities in the tax code. Very wealthy Americans have many perfectly legal options to reduce their tax burden -– tactics not available to poor and middle-class taxpayers. ... "The most interesting thing he disclosed was what we saw initially on the 2010 return -– the vast array of offshore investment vehicles that plainly reflected a lot of aggressive tax planning," said New York University Law School professor Daniel Shaviro. ...
"Governor Romney's limited disclosures revealed hints of troubling issues, and his stonewalling of the electorate therefore left many troubled by the unknown breadth of the gulf between the carefully cultivated image of the candidate, on the one hand, and the authentic man, on the other," Kleinbard said. ...
In the closing days of the campaign, University of Texas law professor Calvin Johnson penned an op-ed for Tax Notes suggesting that Romney illegally undervalued his investments in order to dodge taxes on two enormous trust funds. Bloomberg detailed Romney's use of a bogus charity to reduce his tax burden, a tactic which the IRS banned just months after Romney had set up his own, which he continues to profit from.
- Linda Beale (Wayne State), Romney's Failure to Release Tax Returns and His Tendency to Misstatements of Fact
- Dan Shaviro (NYU), One Last Time on Romney's Taxes
Friday, November 2, 2012
Over the past several weeks, Tax Foundation economists have published a series of studies that analyze the long-term economic and distributional effects of the tax plans outlined by President Barack Obama and Governor Mitt Romney. These comprehensive assessments were done using the Tax Foundation’s Tax Simulation and Macroeconomic Model which measures how changes in tax policies affect the economic levers that determine economic growth, workers’ incomes, and the distribution of the tax burden.
New York Times: Nonpartisan Tax Report Withdrawn After GOP Protest:
The Congressional Research Service has withdrawn an economic report [Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 (R42729) (Sept. 14, 2012), by Thomas L. Hungerford] that found no correlation between top tax rates and economic growth, a central tenet of conservative economic theory, after Senate Republicans raised concerns about the paper’s findings and wording....
The decision, made in late September against the advice of the agency’s economic team leadership, drew almost no notice at the time. ... But it could actually draw new attention to the report, which questions the premise that lowering the top marginal tax rate stimulates economic growth and job creation. ...
Senate Republican aides said they had protested both the tone of the report and its findings. Aides to Mr. McConnell presented a bill of particulars to the research service that included objections to the use of the term "Bush tax cuts” and the report’s reference to “tax cuts for the rich,” which Republicans contended was politically freighted.
They also protested on economic grounds, saying that the author, Thomas L. Hungerford, was looking for a macroeconomic response to tax cuts within the first year of the policy change without sufficiently taking into account the time lag of economic policies. Further, they complained that his analysis had not taken into account other policies affecting growth, such as the Federal Reserve’s decisions on interest rates.
“There were a lot of problems with the report from a real, legitimate economic analysis perspective,” said Antonia Ferrier, a spokeswoman for the Senate Finance Committee’s Republicans. “We relayed them to C.R.S. It was a good discussion. We have a good, constructive relationship with them. Then it was pulled.”
The pressure applied to the research service comes amid a broader Republican effort to raise questions about research and statistics that were once trusted as nonpartisan and apolitical. ... “When their math doesn’t add up, Republicans claim that their vague version of economic growth will somehow magically make up the difference. And when that is refuted, they’re left with nothing more to lean on than charges of bias against nonpartisan experts,” said Representative Sander Levin of Michigan, ranking Democrat on the House Ways and Means Committee....
The report received wide notice from media outlets and liberal and conservative policy analysts when it was released on Sept. 14. It examined the historical fluctuations of the top income tax rates and the rates on capital gains since World War II, and concluded that those fluctuations did not appear to affect the nation’s economic growth. “The reduction in the top tax rates appears to be uncorrelated with saving, investment and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie,” the report said. “However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.” ...
Mr. Hungerford, a specialist in public finance who earned his economics doctorate from the University of Michigan, has contributed at least $5,000 this election cycle to a combination of Mr. Obama’s campaign, the Democratic National Committee, the Democratic Senatorial Campaign Committee and the Democratic Congressional Campaign Committee.
Wall Street Journal editorial: Congressional Research Hit Job: Democrats Politicize a Supposedly Nonpartisan Think Tank:
The Congressional Research Service is supposed to be a nonpartisan research tool for the House and Senate, but like so many institutions in Washington it is now being hijacked for partisan ends. The dispute concerns a highly politicized CRS tax study that Democrats have been trying to use as a cudgel against Mitt Romney.
The tax study just happened to appear on the CRS website in September in the heat of the Presidential tax debate. Author Thomas Hungerford purported to show that 65 years of changes in "top tax rates have had little association with saving, investment or productivity growth." The timing couldn't have been better for President Obama, and the usual liberal media suspects picked it up. So did New York Senator Chuck Schumer, who used it in a speech to attack tax reform.
Mr. Hungerford tells us the study wasn't requested by a Member of Congress, so perhaps it was his idea. You won't be surprised to learn that Mr. Hungerford has donated to the Obama campaign and Senate Democrats and worked as an economist at the White House budget office under Bill Clinton.
Republicans understandably objected to this partisan exercise, especially because the study has statistical design flaws and ignores multiple peer-reviewed studies that have found a significant relationship between cuts in tax rates and the pace of capital formation, investment and economic growth.
CRS officials then pulled the report from its website. In a Sept. 28 email to a Republican Senate staffer, CRS deputy director Colleen Shogan wrote that "I decided to remove the Hungerford report from the CRS website for now." She added that she had given Mr. Hungerford's manager, Don Marples, "a list of concerns I would want addressed in a future version" and that "in particular, I want a better, more robust defense of the methodology in the paper."
Now Senate Democrats are trying to portray Mr. Hungerford as a victim of censorship due to GOP pressure, and Thursday they got an impressionable Jimmy Olson at the New York Times to buy the spin. The reality is that sometime after we called Mr. Hungerford, he or someone else at CRS talked to Senate Democrats, who decided to give the study one more propaganda run before Election Day. ...
This episode is nonetheless a significant blot on the CRS reputation for unbiased research. We're not sure why Congress needs a research operation when it already has a budget office, a tax committee and thousands of staff, but it surely doesn't need one that acts like an arm of the Democratic Party.
(Hat Tip: Ann Murphy, Mike Talbert.)
- New York Times: Gingrich and the Destruction of Congressional Expertise, by Bruce Bartlett
- New York Times: More on Tax Rates and Growth, by Economix Editors
- New York Times: Republicans Censor What They Can’t Refute, by Bruce Bartlett
Wednesday, October 31, 2012
Law Profs back President Obama over Mitt Romney 72% to 19%, according to Brian Leiter's poll.
Update #1: Brian Leiter closed the poll with 420 votes cast and a final tally of Obama 69%, Romney 22%. See The Law Professors Have Spoken:
I'm impressed (or distressed) by the strong showing for the Republican, and surprised by the tepid support for both Johnson and Stein. As further evidence that legal academics lean to the right, do contrast the results when I polled philosophers on the election!
Update #2: Ann Althouse (Wisconsin) has followed up with her own poll: the vote of her readers is currently Romney 88%, Obama 3% (the President is losing to Libertarian Gary Johnson (7%)).
Tuesday, October 30, 2012
Huffington Post: Tax Expert Calvin Johnson 'Skeptical' Of Mitt Romney's Taxes:
A respected tax attorney and deficit hawk wrote a letter to the editor of Tax Notes on Monday saying that, "There is good reason to be skeptical" of Mitt Romney's claim to have paid all the taxes he legally owes.
The letter, by University of Texas Law School Professor Calvin Johnson, focuses on two trusts Romney has set up: one for his children, which is worth over $100 million, and an $87 million retirement trust. These trusts have grown at an enormous rate -- Johnson notes that they have been more than 10 times as profitable as Warren Buffett's investments over the same time frame. Johnson writes that Romney may have played fast and loose with the law by undervaluing Bain Capital assets that were contributed to the trusts. By undervaluing the assets, Romney could avoid paying gift taxes.
(Hat Tip: Marty McMahon.)
Bloomberg: Romney Avoids Taxes via Loophole Cutting Mormon Donations, by Jesse Drucker:
In 1997, Congress cracked down on a popular tax shelter that allowed rich people to take advantage of the exempt status of charities without actually giving away much money. Individuals who had already set up these vehicles were allowed to keep them. That included Mitt Romney, then the chief executive officer of Bain Capital, who had just established such an arrangement in June 1996.
The charitable remainder unitrust, as it is known, is one of several strategies Romney has adopted over his career to reduce his tax bill. While Romney’s tax avoidance is legal and common among high-net-worth individuals, it has become an issue in the campaign. President Barack Obama attacked him in their second debate for paying “lower tax rates than somebody who makes a lot less.”
In this instance, Romney used the tax-exempt status of a charity -- the Mormon Church, according to a 2007 filing -- to defer taxes for more than 15 years. At the same time he is benefitting, the trust will probably leave the church with less than what current law requires, according to tax returns obtained by Bloomberg this month through a Freedom of Information Act request.
In general, charities don’t owe capital gains taxes when they sell assets for a profit. Trusts like Romney’s permit funders to benefit from that tax-free treatment, said Jonathan Blattmachr, a trusts and estates lawyer who set up hundreds of such vehicles in the 1990s. “The main benefit from a charitable remainder trust is the renting from your favorite charity of its exemption from taxation,” Blattmachr said. Despite the name, giving a gift or getting a charitable deduction “is just a throwaway,” he said. “I used to structure them so the value dedicated to charity was as close to zero as possible without being zero.” ...
Romney’s CRUT, which is only a small part of the $250 million that Romney’s campaign cites as his net worth, has been paying him 8 percent of its assets each year. As the Romneys have received these payments, the money that will potentially be left for charity has declined from at least $750,000 in 2001 to $421,203 at the end of 2011. ...
Romney’s trust was projected to leave to charity an amount with a present value of a little less than 8% of the initial contribution. ... Thus, the specifics of Romney’s trust wouldn’t have passed legal muster if it had been set up 13 months later. ... Because the trust’s investments have been earning a return far below its annual payouts to the Romneys, its principal has dwindled rapidly....
In 2001, five years after it was established, the trust had a value of between $750,000 and $1.25 million. Since then, it has pursued a conservative investment strategy -- regardless of the ups and downs of the stock market -- buying a mix of money- market funds, federally-backed bonds and federal bond funds. Since 2007, it has moved its assets entirely into cash. By 2011, its investments earned a return of $48, down from between $60,001 and $100,000 in 2001. It paid $36,696 to the Romneys in 2011. The current investing strategy favors the Romneys over the charity because they get a guaranteed payout. ...
If the CRUT maintains the same investing strategy, assets will continue to shrink, said Jerome M. Hesch, a tax and estate planning attorney at the law firm Carlton Fields. The trustee acted prudently in protecting against losses during a stock market decline, he said.Nevertheless, “what’s going to go to charity is probably close to nothing,” Hesch said.
- Linda Beale (Wayne State), Romney's CRUT Tax Shelter
(Hat Tip: Bob Kamman.)
Monday, October 29, 2012
Austin American-Stateman op-ed: Romney Tax Plan Doesn’t Add Up, Helps Wealthy Too Much, by Calvin H. Johnson (Texas):
Mitt Romney has aggressively promised large tax cuts for the richest taxpayers. President Barack Obama opposes them. Romney has simultaneously promised not to increase the deficit or increase middle class tax, but he has not specified what tax loopholes and tax subsidies he would attack to fund his plan.
There are not enough tax subsidies to keep all of Romney’s promises. Romney, moreover, also defends some important and wasteful loopholes. ...
Our current tax system resembles a sponge with lots of holes, but not very much fiber left. Over the years, brilliant tax planners, indifferent IRS rules, and members of Congress who are trying to represent us have created the loopholes. There seems to be a great rule that empires fall because their taxes inevitably fall apart. Aggressive tax reform that goes after the tax loopholes in the federal tax system would do the country good. Romney gives at least lip service to ending loopholes and tax subsidies, but then to actually do it, we are going to have to get specific.
It does less harm to the sum of human happiness to take tax from the rich instead of the poor. The Little Match Girl had only her matches to keep her alive. Tax her and she is dead. Uncle Scrooge McDuck took his income in coins that were added to swimming pools of gold coins in various vaults. The coins were never very good swimming pools, so loss of one would not be missed much. If we need a dollar to pay for the Marines or close the deficit, it is better to take it from Uncle Scrooge. That will do less harm.
Friday, October 19, 2012
Tuesday, October 16, 2012
Mitt Romney and his running mate, Paul Ryan, are quite insistent that their tax plan is just the elixir that the economy needs to jumpstart growth. ... In principle, a change that holds revenues constant while lowering marginal tax rates – the rate on the last dollar earned – should increase growth. That is because, in economist-speak, both the income and the substitution effects are pushing in the same direction. ... What Reagan did and Mr. Romney proposes is to keep taxes constant but to reduce marginal tax rates. ...
[E]conomic theory is unambiguous that holding taxes constant and reducing marginal rates will increase growth. But it is important to understand that this effect is neither large nor instantaneous. At best, it will raise the long-term trend rate of growth by perhaps tenths of a percent. With compounding, the effect can eventually be large.
But the idea that tax reform will jump-start an economy suffering from the after-effects of a cyclical downturn is nonsense. This can be illustrated by looking at the impact of the 1986 tax reform.
Real gross domestic product growth was about the same after the 1986 act took effect in 1987 as it was before, and tax reform obviously did nothing to forestall the 1990-91 recession. Unemployment fell, but it had been trending downward before tax reform, and the 1986 act probably had nothing to do with it. Within a couple of years it was trending upward again.
By the mid-1990s, it was the consensus view of economists that the Tax Reform Act of 1986 had little, if any, impact on growth. In an article in the May 1995 issue of the American Economic Review, the Harvard economist Martin Feldstein, a strong supporter of tax reform who had served as chairman of Reagan’s Council of Economic Advisers, found large changes in the composition of income, but the only growth effect was a small increase in the labor supply of married women.
In a comprehensive review of the economic effects of the 1986 tax reform act, in the June 1997 issue of the Journal of Economic Literature, Alan Auerbach of the University of California, Berkeley, and Joel Slemrod, the University of Michigan economist, also found that the primary impact was on the shifting composition of income. They could find no significant growth effects. ...
Mr. Romney’s plan is not likely to be enacted in anywhere near the form he has proposed, if only because Congress is far more polarized today than it was in 1986, and the major political parties are much farther apart on the goals of tax reform. Consequently, there is little reason to think we will see tax reform any time soon, and even if Mr. Romney’s plan is enacted as proposed the growth effect will be small to nonexistent.
New York Times editorial, Mr. Romney Needs a Working Calculator:
To the annoyance of the Romney campaign, members of Washington’s reality-based community have a habit of popping up to point out the many deceptions in the campaign’s blue-sky promises of low taxes and instant growth. The latest is the Joint Committee on Taxation, an obscure but well-respected Congressional panel — currently evenly divided between the parties — that helps lawmakers calculate the effect of their tax plans.
The Romney campaign claims it has six studies proving it can be done, but, on examination, none of the studies actually make that point, or counterbalance the nonpartisan analyses that use real math. ... It is increasingly clear that the Romney tax “plan” is not really a plan at all but is instead simply a rhapsody based on old Republican themes that something can be had for nothing. For middle-class taxpayers without the benefit of expensive accountants, the bill always comes due a few years later.
American Enterprise Institute: Obama’s Big Tax Increases on Small Business:
It is quite a stretch for President Obama to argue that he wants to cut taxes for small businesses. In reality, he is proposing to increase taxes on small businesses by around $49 billion. ...
While in the strictest sense it is true that the president has lowered taxes for small businesses 18 times, this does not accurately reflect the totality of his small-business tax policy. In fact, on net, the president’s policy proposals will inflict significant harm on small businesses.
First, to the 18 times. ... [H]is “tax cuts” for small businesses have not been across-the-board marginal rate cuts, but instead have been targeted and often temporary deductions, tax credits, and subsidies. ... Of the 18, only 10 of them are still in place. Half of these 10 are extensions of programs first enacted by President George W. Bush or even before his time in office. ... So we started with 18, but now we’re down to 5. Estimates from the Congressional Budget Office, the Joint Committee on Taxation, and the U.S. Treasury Department suggest that the sum total of the tax breaks created by the remaining five will amount to at most $3 billion in 2013. ...
[T]he president has proposed the expiration of the Bush tax cuts, which will increase taxes by 4.6 percentage points on incomes above $250,000. Obama will increase taxes by a further 3.8 percentage points on these same incomes through the Unearned Income Medicare Contribution. ... And we shouldn’t forget the reimplementation of the Pease provision, also scheduled for January 1, which adds an additional 1 percentage point to the effective tax rate for these businesses.
It should come as no surprise that these tax increases dwarf the $3 billion in tax decreases that the president has brought small businesses.
According to a report by the Joint Committee on Taxation, approximately $690 billion of business income will be reported on tax returns subject to the marginal rate increases. A very conservative estimate based on IRS figures of the distribution of partnership and S-Corp income shows that only about 80 percent of this income is actually subject to the highest marginal rate, which puts the size of the tax hike at around 9.4% of 80% of $690 billion, or about $52 billion.
That $52 billion is much more than the sum of all tax breaks, which was about $3 billion. So it’s quite a stretch for the president to argue that he wants to cut taxes for small businesses. In fact, he wants to raise taxes on small businesses by an order of magnitude.
(Hat Tip: Glenn Reynolds.)
Friday, October 12, 2012
What did voters learn about the future of tax policy?
- Joe Biden and the $500 Billion Tax Cut for the Wealthy
- How Do You Define Small Business?
- The Competing Goals of Focused Deduction Elimination and Tax Reform
Update: Citizens for Tax Justice: Top Ten Tax Moments from the VP Debate:
- Biden Highlights the Regressiveness of Extending All the Bush Tax Cuts
- Ryan Promises the Mathematically Impossible
- Biden Calls Ryan Out for Taking Capital Gains Tax Breaks Off the Table
- Ryan and Biden Dispute the Definition of Small Businesses
- Biden Takes on Romney and Ryan’s Commitment to Grover Norquist
- Ryan Misrepresents History of 1986 Tax Reform
- Biden Revives Romney’s 47% Remark
- Ryan Claims Obamacare Includes 12 Middle Class Tax Hikes
- Biden Stumbles on the Primary Cause of Great Recession
- Ryan Wrong on How Much Revenue Could Be Raised by Taxes on the Rich
Thursday, October 11, 2012
Tuesday, October 9, 2012
The Weekly Standard: Princeton Economist: Obama Campaign Is Misrepresenting My Study on Romney's Tax Plan:
Last night, the Obama campaign blasted out another email claiming that Mitt Romney's tax plan would either require raising taxes on the middle class or blowing a hole in the deficit. "Even the studies that Romney has cited to claim his plan adds up still show he would need to raise middle-class taxes," said the Obama campaign press release. "In fact, Harvard economist Martin Feldstein and Princeton economist Harvey Rosen both concede that paying for Romney’s tax cuts would require large tax increases on families making between $100,000 and $200,000."
But that's not true. Princeton professor Harvey Rosen tells THE WEEKLY STANDARD in an email that the Obama campaign is misrepresenting his paper on Romney's tax plan:
I can’t tell exactly how the Obama campaign reached that characterization of my work. It might be that they assume that Governor Romney wants to keep the taxes from the Affordable Care Act in place, despite the fact that the Governor has called for its complete repeal. The main conclusion of my study is that under plausible assumptions, a proposal along the lines suggested by Governor Romney can both be revenue neutral and keep the net tax burden on taxpayers with incomes above $200,000 about the same. That is, an increase in the tax burden on lower and middle income individuals is not required in order to make the overall plan revenue neutral.
- Wall Street Journal: Princeton Economist Harvey Rosen on How the Romney Tax Plan Can be Revenue Neutral Without Increasing Taxes on Lower or Middle Income Americans
Monday, October 8, 2012
Washington Post Fact Checker: Obama’s Claim That the Bush Tax Cuts Led to the Economic Crisis:
“Now Governor Romney believes that with even bigger tax cuts for the wealthy, and fewer regulations on Wall Street, all of us will prosper. In other words, he’d double down on the same trickle-down policies that led to the crisis in the first place.”
While some on the left have speculated about some kind of Rube Goldberg phenomenon — that the tax cuts put so much money in the pockets of the rich that they had nothing to spend it on but risky and exotic financial instruments — we are unaware of any respected academic study making this link. The Bush tax cuts have been amply criticized for costing too much and generating too little economic growth, but that’s entirely different from causing the Great Recession. Indeed, the official government inquiry, the 631-page final report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, makes no mention of the Bush tax cuts. ...
It is time for the Obama campaign to retire this talking point, no matter how much it seems to resonate with voters. The financial crisis of 2008 stemmed from a variety of complex factors, in particular the bubble in housing prices and the rise of exotic financial instruments. Deregulation was certainly an important factor, but as the government commission concluded, the blame for that lies across administrations, not just in the last Republican one.
In any case, the Bush tax cuts belong at the bottom of the list — if at all. Moreover, it is rather strange for the campaign to cite as its source an article that, according to the author, does not support this assertion.
We nearly made this Four Pinocchios but ultimately decided that citing deregulation in conjunction with tax cuts kept this line out of the “whopper” category. Still, in his effort to portray Romney as an echo of Bush, the president really stretches the limits here.
(Hat Tip: Glenn Reynolds.)
Sunday, October 7, 2012
Today is the fifth annual Pulpit Freedom Sunday, as1,400 pastors plan to discuss politics and candidates in their sermons, flouting the law against campaigning by churches.
- CBS News, The Message Behind "Pulpit Freedom Sunday"
- CNN, Pastors Prepare to Take on IRS Over Political Endorsement Ban
- Daily Beast, ‘Pulpit Freedom Sunday’ Pastors Don’t Care About Religious Freedom
- Forbes, WWJD*? Pulpit Freedom Sunday Likely to Bring Slams Against Obama, Romney
- Huffington Post, Pulpit Freedom Sunday: Pastors Challenge IRS Ban On Political Endorsements
Thursday, October 4, 2012
Wall Street Journal editorial: Obama vs. Volcker, Et Al.: The President's Advisers Agree With Romney on a Territorial Tax Reform:
Americans are learning that President Obama will do whatever it takes to win re-election, and that includes repudiating reforms that his hand-picked advisers support. The latest example is his opposition to a "territorial" corporate tax policy, which he appears to have jumped on mainly because Mitt Romney has endorsed it.
The issue is whether the U.S. should adopt a territorial levy, which would tax American companies at the rate of the country where they earn income. Most of the world taxes its companies this way, not least because it helps keep home-grown companies globally competitive. The U.S. is a rare exception in taxing U.S. companies at America's 35% corporate tax rate if they decide to repatriate income earned abroad. ...
Yet, believe it or not, Mr. Obama now claims that the territorial reform will lead to the "outsourcing" of some 800,000 U.S. jobs. The White House based this jobs number on a study by economist Kimberly Clausing of Reed College. [A Challenging Time for International Tax Policy, 136 Tax Notes 281 (July 16, 2012).] Too bad it told only half the story. ...
Ms. Clausing's research more or less confirms the obvious, which is that tax rates matter to corporate decision-makers. She acknowledges that the 800,000 lost-job prediction assumes the current U.S. tax rate of 35% (or a 27.1% effective rate). She even makes clear that "if the U.S. effective tax rate were to fall due to changes in tax policy, the calculated jobs responses would be lower."
So the real job killer is the high relative U.S. corporate tax rate. As it happens, Mr. Romney favors cutting the corporate tax rate to 25%.
Advocates of a territorial tax system also say that Ms. Clausing's research overlooks some of the advantages of such a policy. For example, it would help U.S. corporations—like Microsoft, Exxon, Apple and Wal-Mart—compete in overseas markets against German, Chinese and Swiss firms that pay lower tax rates. Numerous studies have found that when U.S. companies are more profitable around the world, American workers also benefit.
All of this explains why the territorial reform has been recommended by many of the members of Mr. Obama's own Council on Jobs and Competitiveness, chaired by General Electric CEO Jeffrey Immelt; suggested as a major tax reform option by Mr. Obama's own Economic Recovery Advisory Board led in 2010 by former Federal Reserve Chairman Paul Volcker; and endorsed by his own deficit-reduction commission co-chaired by Alan Simpson and Erskine Bowles. ...
Our own view is that a territorial tax reform would be less important if the U.S. corporate tax rate weren't so high. In addition to hurting competitiveness, the high rate invites Congress to pass loopholes that offer special favors for the most politically influential companies. The best way to reduce this tax arbitrage is to cut the U.S. corporate rate to the international average of 25%, or preferably much lower. The economically ideal rate is zero because corporations are mainly tax collectors, but that's a different editorial.
- Biden Mischaracterizes Clausing Study in Claim That Romney's Territorial Tax Plan Would 'Create 800,000 Jobs, All of Them Overseas' (Sept. 7, 2012)
- Obama accused Romney of proposing a $5 trillion tax cut. Not true. Romney proposes to offset his rate cuts and promises he won’t add to the deficit.
- Romney again promised to “not reduce the taxes paid by high-income Americans” and also to “lower taxes on middle-income families,” but didn’t say how he could possibly accomplish that without also increasing the deficit.
- Obama again said he’d raise taxes on upper-income persons only to the “rates that we had when Bill Clinton was president.” Actually, many high-income persons would pay more than they did then, because of new taxes in Obama’s health care law.
Wednesday, October 3, 2012
In August, the Urban-Brookings Tax Policy Center (TPC) released a report [updated here] claiming to show that Mitt Romney's tax reform plan would necessarily raise taxes on middle-class taxpayers and reduce their after-tax incomes, while giving a significant tax cut to high-income taxpayers. This conclusion is based on a distributional analysis that assumes Romney's revenue-neutral tax reform plan, which includes an across-the-board 20% cut in marginal income tax rates and an elimination of the alternative minimum tax, would require a significant reduction in most tax expenditures, including most notably the child tax credit, mortgage interest deduction, state and local tax deduction, and the exclusion of employer-provided health insurance.This TPC study showing Romney's tax plan as "raising taxes on the middle-class yet cutting taxes for the rich" has generated quite a bit of attention. Some economists such as Martin Feldstein and Harvey Rosen have taken issue with the study, arguing that Romney's tax plan would not necessarily require raising taxes on the middle class.
One shortcoming of the TPC paper pointed out by Rosen is its "static" nature, meaning it fails to account for any income growth effects from the tax reform plan. Most economists would agree that revenue-neutral tax reform like that pushed by Romney would reduce economic distortions in the tax code and thereby increase economic efficiency and incomes by some degree over the long-term. Furthermore, unlike tax cuts that require debate over the economic effects of their financing, revenue-neutral tax reform does not need financing. In fact, if the plan was revenue-neutral on a static basis, it would likely raise revenue because it increases the size of the overall income tax base in the long-run.
[I]f one assumes a 1% dynamic income growth effect under Romney's plan (as interpreted by the TPC), then low-and-middle income earners would experience a slight increase in after-tax income as opposed to a decrease. A more modest growth of less than 1% would imply a decrease in after-tax income for low-and-middle-income earners, but a more robust growth of more than 1% would imply a substantive increase in after-tax income.
- Wall Street Journal: The Romney Hood Tax Fairy Tale (Aug. 9, 2012)
- Forbes: The Romney Tax Plan, the Tax Policy Center, and the Wall Street Journal (Aug. 10, 2012)
- Wall Street Journal: Mathematically Possible -- Correcting the False Assumptions of Obama's Tax Gurus (Aug. 14, 2012)
- FactCheck.org: Do Five Economic Studies Support Romney's Tax Plan? (Sept. 22, 2012)
- Heritage Foundation: The Tax Policy Center’s Skewed Analysis of Romney's Tax Plan (Sept. 25, 2012)
Update: Tax Foundation: Simulating the Economic Effects of Romney’s Tax Plan:
While the debate over tax reform has been consumed with distributional issues, the economy continues to limp along in the worst recovery since the Great Depression. To be sure, this economy faces headwinds that even an ideal tax code will not address, but pro-growth tax reform can provide substantial benefits. Our results indicate that by lowering tax rates on investment and labor, the Romney tax plan would grow the economy by 7.4%, the capital stock by almost 19%, wages by almost 5%, and hours worked by 3%. The benefits would be widely enjoyed, as every income group would experience at least a 7% increase in after-tax income. It would benefit the federal budget as well, in that fully 60% of the static revenue loss from Romney’s plan would be recovered from taxing a larger economy.
Tuesday, October 2, 2012
New York Times: Offshore Tactics Helped Increase Romneys’ Wealth, by Michael Luo & Mike McIntire:
Buried deep in the tax returns released by Mitt Romney’s presidential campaign are references to dozens of offshore holdings with names like Ursa Funding (Luxembourg) S.à.r.l. and Sankaty Credit Opportunities Investors (Offshore) IV, based in the Cayman Islands.
Mr. Romney, responding to opponents’ barbs about his use of overseas tax havens, has offered a narrow defense, saying only that the investments, many made through the private equity firm he founded, Bain Capital, have yielded him “not one dollar of reduction in taxes.”
A review of thousands of pages of financial documents and interviews with tax lawyers found that in some cases, the offshore arrangements enabled his individual retirement account to avoid taxes on its investments and may well have reduced Mr. Romney’s personal income tax bills.
But perhaps a more significant impact of Mr. Romney’s offshore investments has been on the profit side of the ledger — in the way Bain’s tax-avoidance strategies have enhanced his income.
Some of the offshore entities enabled Bain-owned companies to sidestep certain taxes, increasing returns for Mr. Romney and other investors. Others helped Bain attract foreign investors and nonprofit institutions by insulating them from taxes, again augmenting Mr. Romney’s bottom line, since he shared in management fees based on the size of each Bain fund.
The documents — which include confidential Bain prospectuses and foreign regulatory filings, many previously unreported — illustrate how these tax-avoidance strategies are woven into the fabric of Bain’s deal making. While hardly a novel concept and not unique to Bain, the inevitable result is that elite investors like Mr. Romney are able to increase their fortunes in ways unavailable to most taxpayers.
- New York Times editorial: Mr. Romney’s Government Handout:
The biggest beneficiaries of government largess are not those who struggle along on Social Security payments, Medicare or Medicaid benefits, or earned-income tax credits, despite what Mitt Romney has told his donors. Rather, they are those at the highest end of the income scale: government contractors, corporate farmers and very rich individuals who have figured out how to exploit the country’s poorly written tax code for their benefit.
The latter group’s most prominent member is Mr. Romney himself, whose astonishingly low tax rates are made possible by finding and using every loophole and flaw in the code. What his tax practices show is not illegal or unethical behavior, but rather the unfairness of a tax system that provides its most outlandish benefits only for the very, very rich and savvy. What is worse is that Mr. Romney has proposed making this profoundly dysfunctional system even more unfair.
(Hat Tip: Mike Talbert.)
Friday, September 28, 2012
Preview of a Second Obama Administration? French President Proposes 75% Tax Rate on Millionaires, Eschews Tax Reform
Thursday, September 27, 2012
Bloomberg: Romney ‘I Dig It’ Trust Gives Heirs Triple Benefit, by Jesse Drucker:
In January 1999, a trust set up by Mitt Romney for his children and grandchildren reaped a 1,000 percent return on the sale of shares in Internet advertising firm DoubleClick Inc. If Romney had given the cash directly, he could have owed a gift tax at a rate as high as 55%. He avoided gift and estate taxes by using a type of generation-skipping trust known to tax planners by the nickname: “I Dig It.”
The sale of DoubleClick shares received before the company went public, detailed in previously unreported securities filings reviewed by Bloomberg News, sheds new light on Romney’s estate planning -- the art of leaving assets for heirs while avoiding taxes. The Republican presidential candidate used a trust considered one of the most effective techniques for the wealthy to bypass estate and gift taxes. The Obama administration proposed cracking down on the tax benefits in February.
While Romney’s tax avoidance is both legal and common among high-net-worth individuals, it has become increasingly awkward for his candidacy since the disclosure of his remarks at a May fundraiser. He said that the nearly one-half of Americans who pay no income taxes are “dependent upon government” and “believe that they are victims.”
“People like Mitt Romney make a lot of money, but they pay very little income tax,” said Victor Fleischer, a tax law professor at the University of Colorado who has written extensively about private equity and taxes. “Then by dodging the estate and gift tax, they are able to build dynastic wealth. These DoubleClick documents really show that tax planning in action.” The Obama administration estimates that closing the loophole Romney used would bring the federal government almost $1 billion in the coming decade. ...
Multimillionaires use such trusts to avoid those taxes in three ways. First, they can assign a low value to assets they donate to the trust. Second, when the trust sells assets at a profit, the donors can pay the relatively low capital gains taxes on behalf of the trust. By doing so, they leave more money in the trust, untouched by the much higher gift tax. Third, by paying those taxes, they can reduce the pile of wealth eventually subject to an estate tax when they die.
Mitt Romney and his wife, Ann, more than doubled their investment income from foreign sources in 2011 versus 2010, including some sources in tax havens around the world, according to tax returns released by the Republican presidential nominee's campaign.
The Romneys reported $3.5 million in foreign income out of $13.7 million in 2011 adjusted gross income, the benchmark figure used to figure out taxes owed. That compares with $1.5 million in foreign income on 2010 AGI exceeding $21.6 million, according to the Romneys' tax returns for 2010 and 2011.
That means the Romneys last year derived just over a quarter of their income from non-U.S. investments, such as funds and entities in Bermuda, Luxembourg, the Netherlands, Ireland, and the Cayman and British Virgin Islands, the returns showed. In 2010, the Romneys' foreign income was just 7% of their AGI, which was much higher that year.
While the Romneys' tax strategies are legal, their large share of foreign-sourced income highlights the difference between their tax returns and those of average Americans. ... Overall, the Romneys received income from 50 foreign investment corporations last year, nearly three times the number in 2010, the returns show.
Wednesday, September 26, 2012
The main reason Romney's effective rate is so low is that the American tax code contains a lot of preferences for investment income over labor income. That's something that strikes many people as unfair on its face, and particularly unfair since it often means very low rates for extremely rich people like Rommey. ... But this is definitely an issue where the conservative position is in line with what most experts think is the right course, and Democrats are outside the mainstream.
The reasoning is basically this. You imagine two prosperous but not outrageously so working people living somewhere—two doctors, say, living in nearby small towns. They're both pulling in incomes in the low six figures. One doctor chooses to spend basically 100 percent of his income on expensive non-durables. He goes on annual vacations to expensive cities and eats in a lot of fancy restaurants. The other doctor is much more frugal, not traveling much and eating modestly. Instead, he spends a lot of his money on hiring people to build buildings around town. Those buildings become houses, offices, retail stores, factories, etc. In other words, they're capital. And capital earns a return, so over time the second doctor comes to have a much higher income than the first doctor.
So then there are too different scenarios:— In the world where investment income isn't taxed, the second doctor says to the first doctor "all those fancy vacations may be fun, but I'm being much more prudent. By saving for the future, I'll be comfortable when it comes time to retire and will have plenty left over to give to my kids."— In the world where investment income is taxed like labor income, the first doctor says to the second "man you're a sucker—not only are you deferring enjoyment of the fruits of your labor (boring) but when the money you've saved comes back to you, it gets taxed all over again. Live in the now."That's the theory, at any rate. It's a pretty solid theory, it's in most of the textbooks I've seen, and it shapes public policy in basically every country I'm familiar with.
And the thinking is that world number one where people with valuable skills take a large share of their labor income and transform it into capital goods is ultimately a richer world than the world in which such people just go out to a lot of fancy dinners.
Ezra Klein's WonkBlog (Washington Post): Why Romney’s Tax Rate Should be Low, by Dylan Matthews:
[T]he disagreement among economists isn’t about whether people like Romney are paying too little. It’s about whether or not they’re paying too much.
For contrary views, see:
- Angry Bear, The Effect of Capital Gains Tax on Investment
- Ezra Klein's WonkBlog (Washington Post): The Case for Raising Taxes on Capital Gains, by Ezra Klein
- New York Times op-ed: Romney and the Forbes 400, by Joe Nocera
- Start Making Sense: Should Romney Pay a Lower Tax Rate Than the Rest of Us?, by Dan Shaviro (NYU)
Gov. Mitt Romney’s 2011 tax return highlights the use of a questionable tax planning technique that may have avoided Medicare tax liability on up to $2 million of services income derived from his past employment at Bain Capital. ...
Mr. Romney continues to receive cash payments from the companies that manage Bain Capital’s funds. A couple of weeks ago in this column, I described how private equity firms like Bain Capital convert management fees, which would normally generate ordinary income, into investments that yield capital gain.
R. Bradford Malt, the trustee who manages Mr. Romney’s Bain holdings, has stated that Mr. Romney did not participate in the fee conversion program. One might have logically inferred, then, that Mr. Romney’s share of the management fee income would be reported as wage income on Mr. Romney’s tax return.
Not so. Instead, the payments are reported on Schedule E of the return as distributions from S corporations — the largest being $1,961,325 from Bain Capital Inc. The distinction between wage income and an S corporation distribution is meaningless from a business standpoint, but it’s important for tax purposes.
Current law imposes a 2.9% Medicare tax on all wages and self-employment income. To avoid this tax, taxpayers have an incentive to characterize as much labor income as they can as investment income (like carried interest) or as a distribution from an S corporation. ...
This strategy, more or less, was made famous by the trial lawyer and former presidential candidate John Edwards, giving rise to what is sometimes known in tax policy circles as the Edwards Loophole. (It has been employed more recently by Newt Gingrich, who has provided speaking and consulting services through an S corporation.) The IRS has challenged this abuse of S corporations, finding some success in the courts. ...
The problem is that the line between return on human capital and return on investment capital is difficult to draw. By paying themselves a (modest) salary, the owners of S corporations put the IRS in the difficult position of having to estimate what a reasonable wage is.
In a recent article, the law professor Richard Winchester noted that under current law, the government can rightfully attack these distributions “as being nothing more than disguised compensation.” But because the government is ill equipped to perform the kind of audits that would help detect all potential instances of disguised compensation, Mr. Winchester notes that “the vast majority of these cases probably go unchallenged.”
The use of the S corporation as a tax shelter is widespread. A 2002 Treasury inspector general report stated that of 84 S corporation returns under audit, the average shareholder wage was only $5,300, while the average shareholder distribution was nearly $350,000. Obviously, in many of these cases the wage portion is being deliberately understated.
In the case of Mr. Romney, the issue of his Medicare tax liability is complicated because he no longer provides services to Bain Capital. Some portion of the payment represents payment for past services rendered, but perhaps some amount could be attributed to nonwage income.
Existing case law gives the IRS ample authority to challenge at least some amount of the “true up” payments as remuneration for services rendered. If the entire amount were attributed to past services, then Mr. Romney’s use of the S Corporation avoided $58,000 in Medicare taxes. Without knowing the terms of the severance agreement, however, determining Mr. Romney’s proper tax liability is difficult.
Tuesday, September 25, 2012
Update: For a contrary view, see The Heritage Foundation: More People Should Pay Taxes
It turns out that the best way to address Romney’s underlying concern – that a large and growing number of Americans have lost sight of the real cost of government – might be to remove even more households from the income tax rolls and create a very visible new tax to make up the difference. That is why Republicans, Mitt Romney included, should give serious consideration to Michael Graetz’s Competitive Tax Plan.
Conservatives hate the idea of new taxes. But imagine if every time you bought a cup of coffee, it said on the receipt that you had also just paid a 12.3% consumption tax to the federal government. Instead of paying your taxes once a year, you would pay taxes every time you made a purchase. What better way to remind people of all of the money government spends, and all of the money government spends foolishly, than to make them pay for government several times a day?
That’s not all. Imagine also that the federal income tax only applied to income over $100,000 for married couples, $50,000 for single filers, and $75,000 for head of household filers. Households that earn less than this “family allowance” would be under no obligation to file a federal income tax return. In that case, the 12.3% consumption tax would pay for liberating millions of Americans from the IRS. According to a recent analysis from the Tax Policy Center, the tax policy rules in effect today will require 147,540,000 tax units to file taxes in 2015. Under Graetz’s CTP, that number would fall to 36,625,000. ...
There are, to be sure, huge obstacles in the way of Graetz’s Competitive Tax Plan, as he freely acknowledges. If a Republican gets behind it, we can expect Democrats to demonize it as a tax hike on the poor to fund income tax cuts for the rich, leaving aside the generous rebates and the family allowance. If a Democrat gets behind it, Republicans might wage war against the VAT as a diabolical foreign plot.
All the same, the CTP is the only realistic plan that will preserve progressivity while giving 100% of Americans the sense that they are bearing the cost of our federal Leviathan.
Heritage Foundation: Tax Policy Center’s Skewed Analysis of Governor Romney's Tax Plan:
The Tax Policy Center recently released a report that erroneously concludes that Governor Mitt Romney’s tax reform plan would necessarily cut taxes for the rich and raise them for middle-income and low-income taxpayers. However, despite the authors’ claims, their analysis is far from definitive. Instead, their conclusion is the result of a series of carefully made choices. These choices, not the underlying nature of the Romney plan, cause them to arrive at their selected result. This finding is harming the debate on tax reform.
Saturday, September 22, 2012
Friday, September 21, 2012
Mitt Romney today released his 2011 tax return (FAQ). Curiously, the 2011 estimated return released in connection with Romney's extension reported $20,901,075 AGI, over $7 million more than the $13,696,951 AGI reported on his 2011 return as filed. $1.75 million of that amount represents a foregone charitable deduction:
- The Romneys donated $4,020,772 to charity in 2011, amounting to nearly 30% of their income.
- The Romneys claimed a deduction for $2.25 million of those charitable contributions.
- The Romneys’ generous charitable donations in 2011 would have significantly reduced their tax obligation for the year. The Romneys thus limited their deduction of charitable contributions to conform to the Governor's statement in August, based upon the January estimate of income, that he paid at least 13% in income taxes in each of the last 10 years.
The campaign also released a statement from PriceWaterhouseCoopers on the Romneys’ tax filings over 20 years, from 1990 – 2009:
- In each year during the entire 20-year period, the Romneys owed both state and federal income taxes.
- Over the entire 20-year period, the average annual effective federal tax rate was 20.20%.
- Over the entire 20-year period, the lowest annual effective federal personal tax rate was 13.66%.
- Over the entire 20-year period, the Romneys gave to charity an average of 13.45% of their adjusted gross income.
- Over the entire 20-year period, the total federal and state taxes owed plus the total charitable donations deducted represented 38.49% of total AGI.
The Romney campaign also released this letter from former IRS Commissioner (and current Skadden partner) Fred Goldberg:
These returns reflect the complexity of our tax laws and the types of investment activity that I would anticipate for persons in their circumstances. There is no indication or suggestion of any tax-motivated or aggressive tax planning activities. In my judgment, they have fully satisfied their responsibilities as taxpayers. They have done so by relying on a highly reputable return preparer and other advisors, who have in turn relied primarily on information provided by third parties to them and to the IRS. The end result of that process has been returns that include a multitude of schedules, IRS forms and accompanying statements that provide appropriate transparency and the proper payment of taxes that Governor and Mrs. Romney owe under current law.
Wednesday, September 19, 2012
John O. Fox, 10 Tax Questions the Candidates Don't Want You to Ask:
The Ten Tax Questions:
- The McMansion Tax Break
- The Inequitable Home Equity Break
- Poorest Families, Poorest Child Care
- Social Security’s Insecurity
- A Sick Policy on Health Insurance
- The Oh-So-Golden-Years Pension Break
- The Great Pension Robbery
- Higher Education Denied
- Medicare’s Plunge Toward Insolvency
- Single and Paying For It
The Five Common Tax Myths and Misperceptions:
Tuesday, September 18, 2012
- Mother Jones: Secret Video: Romney Tells Millionaire Donors What He REALLY Thinks of Obama Voters
- Linda Beale (Wayne State): Romney's Tax Views Lead to Blooper Comments Denigrating America's Elderly and Poor
- Kay Bell (Don't Mess With Taxes): 47 Percent Don't Pay Federal Income Taxes, but Do Hand Over Payroll, Other Taxes
- Len Burman (Syracuse), In Mitt's World, My Limo Driver is Not Trying Hard Enough
- Ezra Klein (Washington Post): Mitt Romney Versus the 47 Percent
- Paul Krugman (New York Times): Taxes Over the Life Cycle
- Annie Lowrey (New York Times): The Reasons Behind the ‘People Who Pay No Income Tax’
- Annie Lowrey (New York Times): Who Pays and Who Takes
- Janet Novack (Forbes): Memo to Mitt Romney: The 47% Pay Taxes Too
- Catherine Rampell (New York Times): How Do the 47% Vote?
- Dan Shaviro (NYU): Romney's Erroneous Equation
- Dan Shaviro (NYU): Romney Versus the "47 Percent"
- Dan Shaviro (NYU): Was Romney in the 47 percent (in 2009 or Any Earlier Year)?
- Angry Bear: Who Are the 47%? And the Irony Might be Remarkable
- Bloomberg: Romney’s 47% Paying No Taxes Combines Elderly With Poor Workers
- Center on Budget & Policy Priorities: Misconceptions and Realities About Who Pays Taxes
- The Maddow Blog: Why the '47 Percent' Is So Large
- NPR, The 47 Percent, in One Graphic
- Tax Foundation: How Much do Nonpayers Earn?
- Tax Policy Center: Who Doesn't Pay Federal Taxes
- Tax Update Blog: 47% Frenzy!
- Tax Vox Blog: Why Do People Pay No Federal Income Tax?
- U.S. News & World Report: Romney's 47% Statistic Has Been Used by Conservatives For Years
- Wall Street Journal: The Data Behind Romney’s 47% Comments
Friday, September 14, 2012
There is no evidence that Mr. Romney has violated the law. The principal means he used to pay low taxes on his hundreds of millions of dollars in income was the technique known as carried interest, which allows managers of private equity funds to treat most of the fees they receive for running the funds as capital gains rather than ordinary income.
The technique strikes some -- including President Obama -- as outrageous, but it is legal under current law. Unless and until the Congress changes the law, Mr. Romney has every right to take advantage of the technique.
But there is a related tactic to avoid taxes that is used by some private equity firms, including Bain Capital, whose legality is less clear. The IRS has not challenged it -- at least not publicly -- but some legal scholars say it is not justified, and some private equity firms have not chosen to use it.
The fact that Bain uses the technique became public last month when the Gawker Web site posted annual reports from a number of Bain funds in which Mr. Romney, or his family trusts, have interests. It is clear that some Bain partners saved hundreds of millions of dollars in taxes from its use, but the Romney campaign says he did not benefit from it personally. ... It concerns the management fees that sponsors of private equity funds, such as Bain Capital, are paid. Those fees are separate from the fund profits that the managers are able to treat as carried interest.
Instead of paying ordinary income taxes on those fees, the partners and employees of the fund sponsors pay taxes at much lower capital gains rates. In fact, they do even better than that. In some cases, they defer paying those capital gains taxes for years, itself a substantial benefit.
How good a deal is that? Annual reports from 2009 for four Bain funds showed that over the years the funds converted $1.05 billion in management fees from ordinary income into capital gains.
That directly benefited the Bain partners who shared in the management fees. Assuming they paid the capital gains tax of 15%, rather than the ordinary income tax rate of 35%, they saved about $210 million in income taxes and $28 million more in Medicare taxes.
Some tax experts think the IRS could win if it challenged the practice.
“It is not legal,” said Victor Fleisher, a tax law professor at the University of Colorado, in an interview this week. He noted that different money managers used variations, some of which he said were less likely than others to withstand an audit. “Bain,” he said, “is on the aggressive end of this.”
In an article that appeared in the journal Tax Notes in 2009, Gregg D. Polsky, a tax law professor at the University of North Carolina School of Law who formerly worked in the IRS office of chief counsel, said he believed the IRS had good arguments that would be likely to prevail in court.
In a statement issued by the Romney campaign, Brad Malt, the trustee for Romney’s blind trusts, said the tactic was “a common, accepted and totally legal practice,” although Mr. Romney had never used it personally....
It is quite possible that the maneuver is legal under current tax law, and that Bain and Apollo acted completely appropriately to arrange their affairs to make the taxes owed by their partners and employees as low as possible. Even if the IRS and the courts eventually concluded otherwise, that would not indicate the funds had done anything wrong in asserting the position.
But it is hard for me to see the difference between that and an arrangement under which my employer invested, on my behalf, money that it would otherwise have to pay me for writing this column. Then I would tell the I.R.S. that I owed no taxes until I liquidated the investment, and even then would pay only capital gains rates.
If I tried that, I could not get away with it. If the law lets those who work in private equity do it, Congress should change the law.
At the same time, it should end the carried-interest dodge. Managers are being paid for their services when they receive a share of profits from the fund. The amount may be based on profits, but that is no different from the situation at normal companies that pay bonuses based on company earnings. It is compensation, and should be taxed as such.
Mr. Romney’s former colleagues in private equity may come to regret his candidacy, whether or not he wins. Few in the public understood this particular maneuver before the Bain reports were disclosed. Now many do. If and when Congress decides to reform the tax law, this area is likely to be a prime target.
(Hat Tip: Mike Talbert.)
Thursday, September 13, 2012
One of the services of the Simpson-Bowles Commission was to set out a path for tax reform, with lower income tax rates and removal of many tax preferences or, to use the commission's term, tax expenditures.
It's an approach that has been tried before and worked. Ronald Reagan called for such a reform in 1984 and, after much negotiating, it was hammered out in 1986. Lead roles were played by Treasury Secretary James Baker; the Democratic chairman of the House Ways and Means Committee, Dan Rostenkowski; and the Republican chairman of the Senate Finance Committee, Bob Packwood. ...
Mitt Romney has endorsed a similar procedure. So has Paul Ryan, who included it in the budget he steered to passage in the House.
Romney and Ryan have been criticized for not providing specifics on which tax preferences they would eliminate. But neither did the Simpson-Bowles Commission, which said that "the precise details and exact transition rules should be worked out in a variety of ways by the relevant congressional committees and the Treasury Department." That's how it worked in 1984-'86. ...
The biggest obstacle to 1986-style tax reform is Barack Obama. In his acceptance speech, he reiterated his call for higher tax rates on high earners.
That's as much of a deal killer for Republicans as his late-in-the-day insistence on $400 billion in additional revenues in the August 2011 grand bargain negotiations, documented once again in Bob Woodward's "The Price of Politics." ... Woodward reports that during the grand bargain negotiations, congressional leaders of both parties voted Obama "off the island." Voters who want Simpson-Bowles-type tax reform can do that in November.
Wednesday, September 12, 2012
In a taped interview, host [Meet the Press host] David Gregory repeatedly asked Romney for details of his tax plan. He ended up practically begging for just one detail – any morsel, please. He got zip, zilch, nothing. I don’t care that much about Romney’s personal income tax returns. I can even think of several legitimate reasons why he wouldn’t want to release them. ... But I can think of only one reason why Romney consistently won’t reveal the details of his tax plan. He doesn’t have any! Other than to take care of his rich friends. ...
Meanwhile, back at re-election central, President Obama in his convention acceptance speech last week said that he wants to work for tax reform. No he doesn’t. His first term amply illustrated what I was worried about all along: President Obama doesn’t care a lick about tax reform – which is his perogative, by the way. All he cares about is increasing taxes on the folks he thinks are rich – which actually includes a lot of middle-class households.
From a tax policy standpoint, the choice we have in this upcoming presidential election makes me sick to my stomach.
(Hat Tip: Going Concern.)
Tuesday, September 11, 2012
Harvey S. Rosen (Princeton University, Department of Economics), Growth, Distribution, and Tax Reform: Thoughts on the Romney Proposal:
Governor Romney has proposed a personal income tax reform that would lower marginal tax rates and broaden the tax base. Critics of the proposal have argued that high-income taxpayers would receive a tax cut, and given that the proposal is meant to be revenue neutral, this would inevitably lead to increased taxes for families with low and moderate incomes. Because the Romney proposal does not specify in detail just what tax preferences might be eliminated or scaled back in order to broaden the tax base, much of the debate over it has focused on what provisions would be politically and administratively feasible.
While this discussion has been illuminating in some respects, something seems to be missing. Relatively little has been said about the possible effects of the Romney proposal on economic growth. This is curious because increasing growth is the motivation for the proposal in the first place.
In this paper, I analyze the Romney proposal taking into account the additional income that might be generated by economic growth. The main conclusion is that under plausible assumptions, a proposal along the lines suggested by Governor Romney can both be revenue neutral and keep the net tax burden on high-income individuals about the same. That is, an increase in the tax burden on lower and middle income individuals is not required in order to make the overall plan revenue neutral.
(Hat Tip: Greg Mankiw.)
Friday, September 7, 2012
Biden Mischaracterizes Clausing Study in Claim That Romney's Territorial Tax Plan Would 'Create 800,000 Jobs, All of Them Overseas'
The Claim: Biden said in his prepared remarks that Republican presidential candidate Mitt Romney “has a new tax proposal -- the territorial tax -- that experts say will create 800,000 jobs, all of them overseas.”
The Background: Romney has proposed changing the basic principles of the U.S. international tax system. Under current law, companies owe U.S. taxes on the profits they earn around the world. They receive tax credits for payments to foreign governments and don’t have to pay U.S. taxes until they bring the money home. U.S.-based companies with substantial overseas operations keep profits overseas to avoid taxation here. Romney wants the U.S. to adopt a territorial tax system under which companies would owe little or no taxes on their overseas income.
The Facts: Biden overstated the case. His 800,000 jobs number is based on a study conducted by one expert, Kimberly Clausing, an economics professor at Reed College in Portland, Oregon. Her July analysis [A Challenging Time for International Tax Policy, 136 Tax Notes 281 (July 16, 2012)] examined the effects of a “pure” territorial system under which U.S. companies would face no domestic taxes on their foreign income. ...Clausing’s study doesn’t say that no jobs would be created in the U.S. Instead, it says that a pure territorial tax plan would increase employment by U.S. companies in low-tax countries.
Biden's claim apparently is based on this paragraph from the article:
Based on my research and that of other experts in international taxation, it is possible to estimate how many jobs are at stake in this debate. In 2008 U.S. multinational firms employed 10 million workers in affiliated firms abroad. Under a pure territorial tax system, the tax incentive to locate jobs in low-tax countries would increase significantly, which I calculate would increase employment in low-tax countries by about 800,000 jobs.
Together Mitt Romney and Paul Ryan have put human faces on how the super-rich game the tax system to pay less, pay later and sometimes not pay at all. Both want to expand tax favors for the already rich, like themselves.
Their approach favors dynastic wealth with largely tax-free (Romney) or completely tax-free (Ryan) lifestyles, encouraging future generations of shiftless inheritors. What we need instead is a tax system that encourages strivers in competitive markets, not a perpetual oligarchy.
Romney and Ryan say that lowering tax rates and reducing or eliminating taxes on capital gains and dividends, while letting huge fortunes pass untaxed to heirs, will boost economic growth and mean prosperity for all.
We already tried parts of that, starting with Ronald Reagan in 1981 and doubling down with George W. Bush in 2001. Empirical result: Flat to falling incomes for the vast majority, weak job growth, but skyrocketing incomes for the top one percent of the top one percent, including Romney. ...
[F]undamental tax reform ... honors the time-tested -- and therefore profoundly conservative -- principle of making those who gain the most from society bear the heaviest burden. Romney and Ryan would shove that burden onto those with less, a radical plan by an oligarch and his partner in promoting tax-free living for the richest Americans.
Thursday, September 6, 2012
Among the tax reform plans of the major presidential candidates, Mitt Romney’s proposal to lower rates and eliminate credits and deductions comes far closer than that of President Obama to the widely-praised and bipartisan framework of the Simpson-Bowles tax reform commission.
Mitt Romney’s plan aims for a Simpson-Bowles style reform, with lower rates and fewer tax expenditures, but without additional penalties on saving and investing. The top rate on personal income would be 28% and the bottom rate would be 8%, making the rate structure more progressive than under Simpson-Bowles. In terms of tax expenditures and simplification, Romney has said he would target credits and deductions for “people at the high end” while preserving some preferences targeted at the middle-class such as deductions for mortgage interest and charitable giving.
President Obama’s tax plan, however, is largely at odds with any commonly held notion of tax reform, including Simpson-Bowles. It would result in dramatically higher tax rates, on the order of 50% to 90% higher than the Simpson-Bowles rates on personal income and investment income. While the president has voiced support for eliminating tax expenditures, his specific proposals tend to add more than are taken away, although he has proposed limiting them for high-income earners. Not only does this fail to simplify the tax code, it fails to spur the economy, ultimately resulting in insufficient tax revenue and perpetual deficits.
Real tax reform would produce a tax code that is simple and treats all taxpayers equally. It would also treat all consumption equally, whether that consumption occurs now or, as a result of saving, later. This would best be accomplished by lowering tax rates on saving and investment to match the current zero tax rate on consumption.
- Going Concern
- Huffington Post
- U.S. News & World Report
- Wall Street Journal
(Hat Tip: Bob Kamman.)
Update #1: Glenn Reynolds (Tennessee):
UPDATE: In the comments, a suggestion that this is just a cover story: “As many observers have noted, there’s little question the Obama campaign has Romney’s tax returns. That’s illegal, though -- they had to have been obtained from the government, which indeed is Nixon territory -- so there will have to be some cover story when they are inevitably leaked prior to the election. The Reid nonsense was a start, maybe this is the vehicle.”
ANOTHER UPDATE: Quite a few commenters with tax experience say this is bogus. But reader Mark Jones writes:
It’s not just that the so-called hackers could provide cover for releasing Romney’s tax returns obtained (illegally) by the Obama administration. It’s that they could release PHONY returns showing blatantly illegal or unethical actions on Romney’s part and then, when Romney protests, demand that he prove it by releasing the real returns. The “hackers” provide plausible deniability on two levels: First, “We thought they were the real thing”, and second, “Of course we didn’t obtain his records unlawfully. We didn’t even get the real thing!”
Update #2: Kay Bell (Don't Mess With Taxes):
I think it's a hoax because:
- The ransom amount is pretty low given the information allegedly stolen. Romney is astoundingly rich and the donors who support him are no slouches in the wealth department either. If the candidate's tax returns were stolen they probably would be happy to pony up much, much more to keep them private.
- The deadline is too far down the line. Not that I'm a cybercriminal, but if I had the info, I'd give them a day or two to come up with the money. Giving them three and a half weeks to investigate seems to be asking to be caught. I would get in, get the data, get the money and then get out!
Wednesday, September 5, 2012
We are committed to defeating efforts that would return us to the failed economic policies of the past, in which tax relief for the wealthy explodes the deficit and asks the middle class to shoulder that burden.To help spur economic growth, President Obama and the Democratic Party cut taxes for every working family – providing $3,600 in tax relief to the typical family over the President’s first term in office – and we are committed to extending the middle class tax cuts for the 98 percent of American families who make less than $250,000 a year, and we will not raise taxes on them.
In order to reduce the deficit while still making the investments we need in education, research, infrastructure, and clean energy, the President has asked for the wealthiest taxpayers to pay their fair share. We have to cut what we don’t need in order to make room for the things we do need to grow our economy. We support allowing the Bush tax cuts for the wealthiest to expire and closing loopholes and deductions for the largest corporations and the highest-earning taxpayers. We are committed to reforming our tax code so that it is fairer and simpler, creating a tax code that lives up to the Buffett Rule so no millionaire pays a smaller share of his or her income in taxes than middle class families do. We are also committed to reforming the corporate tax code to lower tax rates for companies in the United States, with additional relief for those locating manufacturing and research and development on our shores, while closing loopholes and reducing incentives for corporations to shift jobs overseas.The Republican Party has a different vision—instead of asking everyone to do their fair share and making investments we need for an economy built to last, they would slash taxes for corporations and the wealthiest Americans, let Wall Street once again write its own rules, and balance the budget on the backs of the middle class. Romney and Congressional Republicans share the same, distorted view of the economy and support the same, lopsided budget. Romney would roll back the tax relief Democrats provided to working families and college students, and would require massive new taxes on the middle class to pay for his $5 trillion tax plan that primarily benefits the wealthy. The Democratic Party opposes efforts to give additional tax cuts to the wealthiest Americans at the expense of the middle class and investments in our future.
Monday, September 3, 2012
Washington Post, Mitt Romney Exited Bain Capital With Rare Tax Benefits in Retirement:
Before Mitt Romney retired from Bain Capital, the enormously profitable investment firm he founded, he made sure to lock in his gains, both realized and expected, for years to come.
He did so, in part, the way millions of other Americans do — with the tax benefits of an individual retirement account. But he was able to turbocharge the impact of those advantages and other tax breaks in his severance package from Bain in a way that few but the country’s super-rich can ever hope to do.
As a result, his IRA could be worth as much as $87 million, according to his estimates, and he can continue to earn tax-advantaged income from Bain more than a decade after he formally left the firm. ...
Romney’s former colleagues say his retirement package is a well-justified reward for a chief executive who built Bain from scratch in 1984 into a financial powerhouse that backed business successes such as Staples and the Sports Authority.
The structure and tax treatment of his retirement, including the IRA, was legally sound and appropriate, they say, adding that he has earned less money over his career than some other top private-equity executives, who earned billions of dollars during the same period.
Details of Romney’s retirement assets are somewhat vague because he has released only one year of full tax returns and declined to provide additional specifics about his personal finances. But interviews with Bain executives and accounting professionals show that he was able to take advantage of tax benefits in innovative ways open only to a narrow slice of extremely affluent people — mostly those who work in private-equity firms and other investment partnerships.
His severance package, for instance, allowed him to continue sharing in the profits of the company as if he were still a partner managing it, according to his 2010 tax return and interviews with present and former Bain executives. And because he benefited from the firm’s investments as if he were an active Bain partner, he paid taxes at a lower rate on these earnings than if they were treated as ordinary retirement income. Romney negotiated the package when he was leaving the firm, Bain executives said, while he set up his IRA long before. ...
Michael Graetz, who served in the Treasury Department under President George H.W. Bush, said massive IRAs such as Romney’s do not reflect the intent of the laws that created the accounts as a way to help working Americans reach financial security. “One need not have $100 million in an IRA in order to accomplish retirement security,” said Graetz, who teaches tax and retirement policy at Columbia Law School. “The law deliberately set limits in order to restrict the revenue losses to the Treasury.”
Another tax expert, Edward Kleinbard of the University of Southern California, who reviewed the prices of some A- and L-shares, said Bain may have undervalued the A-shares, providing a benefit to insiders. Kleinbard, a Democrat and former chief of staff of the Congressional Joint Tax Committee, said the valuation of such shares should reflect real market prices.
But Jack Levin, a tax lawyer who has represented Bain, said the share prices at Bain were worked out “by all the investors at arm’s length based on the company’s prospects and economic condition at the time of the investment.” He said the increase in the value of Romney’s IRA reflected business smarts, not questionable investment practices. “There is nothing magical about it,” Levin said. In the years that Romney ran Bain, the company earned more than a 50% return on investment on average each year. Even a lower rate of return, 26% a year, combined with a regular investment of new funds in the account would give Romney “more than $100 million in his IRA account today,” according to Levin, a lawyer at Kirkland & Ellis. He noted that there was nothing improper about amassing so much wealth. “There is nothing in the tax law that prohibits an IRA from earning as much as the sponsor’s investment acumen allows him or her to earn,” he said.
Another way in which tax rules have favored Romney’s post-Bain financial situation is through the treatment of his severance package from Bain. Again, he benefited from a tax break in a way that is available to very few. His retirement earnings receive what is called the “carried interest” deduction. That’s an accounting classification that treats certain income from private-equity firms and other partnerships as capital gains and taxes it at a rate of 15%, rather than as ordinary income at 35%. ...
Tax experts say Romney can legally share in the carried-interest profits and take the deduction if Bain has agreed to the arrangement. Critics of the carried-interest deduction say this example highlights how the tax break can be abused. “Carried interest was intended to motivate managers going forward,” said Victor Fleischer, an expert in carried interest at the University of Colorado law school. “In cases like the Romneys, it just shows it is really all about fancy tax planning. It’s not motivating managers going forward. Not only is Mitt not providing any future services, Ann never did.” ...
Some tax experts worry that the arrangements Romney benefits from set a bad precedent for a president. “He looks for every tax angle to a degree that is unbecoming in someone who would be the executive in command of the administrative apparatus that enforces the tax law,” said Lee Sheppard, a tax lawyer and contributing editor for Tax Analysts, a publication for accounting and legal professionals.