TaxProf Blog

Editor: Paul L. Caron
Pepperdine University School of Law

Tuesday, October 30, 2012

Romney Benefits From Zeroed-Out CRUT With Mormon Church

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.

(Hat Tip: Bob Kamman.)

October 30, 2012 in Political News, Tax | Permalink | Comments (2) | TrackBack (0)

Monday, October 29, 2012

Johnson: Romney Tax Plan Doesn’t Add Up, Helps Wealthy Too Much

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.

October 29, 2012 in Political News, Tax | Permalink | Comments (3) | TrackBack (0)

Friday, October 19, 2012

Mitt Romney and Barack Obama at Last Night's Al Smith Dinner

Tuesday, October 16, 2012

NY Times: Romney's Tax Plan Doesn't Add Up

New York Times:  Romney’s Tax Plan and Economic Growth, by Bruce Bartlett:

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.

October 16, 2012 in Political News, Tax | Permalink | Comments (0) | TrackBack (0)

Obama's $49 Billion Tax Increase on Small Business in 2013

AEIAmerican 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.)

October 16, 2012 in Political News, Tax | Permalink | Comments (4) | TrackBack (0)

Friday, October 12, 2012

Tax Aspects of the Biden-Ryan VP Debate

Anthony J. Nitti (WithumSmith & Brown, Aspen, CO), Reactions to the Biden – Ryan Debate:

What did voters learn about the future of tax policy?

  1. Joe Biden and the $500 Billion Tax Cut for the Wealthy
  2. How Do You Define Small Business?
  3. The Competing Goals of Focused Deduction Elimination and Tax Reform

Update: Citizens for Tax Justice: Top Ten Tax Moments from the VP Debate:

  1. Biden Highlights the Regressiveness of Extending All the Bush Tax Cuts
  2. Ryan Promises the Mathematically Impossible
  3. Biden Calls Ryan Out for Taking Capital Gains Tax Breaks Off the Table
  4. Ryan and Biden Dispute the Definition of Small Businesses
  5. Biden Takes on Romney and Ryan’s Commitment to Grover Norquist
  6. Ryan Misrepresents History of 1986 Tax Reform
  7. Biden Revives Romney’s 47% Remark
  8. Ryan Claims Obamacare Includes 12 Middle Class Tax Hikes
  9. Biden Stumbles on the Primary Cause of Great Recession
  10. Ryan Wrong on How Much Revenue Could Be Raised by Taxes on the Rich

October 12, 2012 in Political News, Tax | Permalink | Comments (3) | TrackBack (0)

Thursday, October 11, 2012

Obama v. Romney Tax Plan Graphic

Obama v. Romney

Source: (Hat Tip: John Salan.)

October 11, 2012 in Political News, Tax | Permalink | Comments (8) | TrackBack (0)

Tuesday, October 9, 2012

Princeton Economist: Obama Is Misrepresenting My Study on Romney's Tax Plan

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.

October 9, 2012 in Political News, Tax | Permalink | Comments (11) | TrackBack (0)

Monday, October 8, 2012

WaPo Awards Three Pinocchios to Obama’s Claim That the Bush Tax Cuts Led to the Economic Crisis

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.

Three Pinocchios

(Hat Tip: Glenn Reynolds.)

October 8, 2012 in Political News | Permalink | Comments (2) | TrackBack (0)

Sunday, October 7, 2012

1,400 Pastors to Bait IRS Today on 'Pulpit Freedom Sunday'

Thursday, October 4, 2012

WSJ: Obama, Romney, and Territorial Tax Reform

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.

October 4, 2012 in Political News, Tax | Permalink | Comments (0) | TrackBack (0)

Tax Whoppers in Last Night's Presidential Debate

FactCheck  Dubious Denver Debate Declarations: Obama and Romney Swap Exaggerations and False Claims in Their First Meeting:

  • 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.

October 4, 2012 in Political News, Tax | Permalink | Comments (25) | TrackBack (0)

Wednesday, October 3, 2012

Tax Foundation: Romney Plan Would Cut Middle Class Taxes (Using 1% Dynamic Scoring Model)

Tax Foundation logoTax Foundation:  Would the Romney Tax Plan Necessarily Reduce After-Tax Incomes for the Middle Class?:

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.

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.

October 3, 2012 in Political News, Tax, Think Tank Reports | Permalink | Comments (7) | TrackBack (0)

Tuesday, October 2, 2012

NY Times: Offshore Tax Tactics Helped Increase Romneys’ Wealth

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.

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.)

October 2, 2012 in Political News, Tax | Permalink | Comments (3) | TrackBack (0)

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

Romney's ‘I Dig It’ Trust Gives Heirs Triple Benefit

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.

September 27, 2012 in Political News, Tax | Permalink | Comments (0) | TrackBack (0)

Romneys Reported Sharp Gain in Foreign Income in 2011 Tax Return

Reuters:  Romneys Reported Sharp Gain in Foreign Income in 2011 Tax Return, by Lynnley Browning:

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.

September 27, 2012 in Political News, Tax | Permalink | Comments (5) | TrackBack (0)

Where the 47% Live

Wednesday, September 26, 2012

Why Mitt Romney Should Pay a Lower Tax Rate Than the Rest of Us

Slate:  Why Mitt Romney's Effective Tax Rate Is So Low And Why It Probably Should Be, by Matthew Yglesias:

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."

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.

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.

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.

Chart 1

For contrary views, see:

September 26, 2012 in Political News, Tax | Permalink | Comments (6) | TrackBack (0)

Fleischer: Mitt Romney's Use of the John Edwards Tax Shelter

NY Times DealBookNew York Times DealBook:   A Tax Shelter Mitt Romney Could Love, by Victor Fleischer (Colorado):

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.

September 26, 2012 in Political News, Tax | Permalink | Comments (5) | TrackBack (0)

Tuesday, September 25, 2012

Why Conservatives Should Favor Even Fewer People Paying Income Tax

100 MillionReuters:  Actually, Conservatives Should Favor Even Fewer People Paying Income Tax, by Reihan Salam:

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.

Update:  For a contrary view, see The Heritage Foundation:  More People Should Pay Taxes

September 25, 2012 in Political News, Tax | Permalink | Comments (2) | TrackBack (0)

Heritage Foundation: The Tax Policy Center’s Skewed Analysis of Romney's Tax Plan

HeritageHeritage 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.

September 25, 2012 in Political News, Tax, Think Tank Reports | Permalink | Comments (0) | TrackBack (0)

Saturday, September 22, 2012 Do Five Economic Studies Support Romney's Tax Plan?

September 22, 2012 in Political News, Tax | Permalink | Comments (2) | TrackBack (0)

Friday, September 21, 2012

Mitt Romney Releases 2011 Tax Return





Tax Rate

Char. Gifts














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.

September 21, 2012 in Political News, Tax | Permalink | Comments (35) | TrackBack (0)

Wednesday, September 19, 2012

Colbert, Fallon & Stewart on Mitt Romney's Comments About the 47%

10 Tax Questions the Candidates Don't Want You to Ask

Tuesday, September 18, 2012

Mitt Romney's Comment About 'The 47% Who Pay No Income Tax'

September 18, 2012 in Political News, Tax | Permalink | Comments (7) | TrackBack (0)

Friday, September 14, 2012

NY Times: A Tax Tactic That’s Open to Question

New York Times:  A Tax Tactic That’s Open to Question, by Floyd Norris:

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.)

September 14, 2012 in Political News, Tax | Permalink | Comments (3) | TrackBack (0)

Thursday, September 13, 2012

Barone: Obama is the Odd Man Out on 1986-Style Tax Reform

Washington Examiner op-ed: Obama Could be the Odd Man Out on Tax Reform, by Michael Barone:

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.

September 13, 2012 in Political News, Tax | Permalink | Comments (2) | TrackBack (0)

Wednesday, September 12, 2012

Bergin: Tax Policies of Romney, Obama Make Me 'Sick to My Stomach'

Romney_obamaChristopher E. Bergin (President, Tax Analysts), Where’s the Tax Plan, Man – Uh, Men?:

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.)

September 12, 2012 in Political News, Tax | Permalink | Comments (12) | TrackBack (0)

Tuesday, September 11, 2012

Rosen: Growth, Distribution, Tax Reform, and the Romney Tax Plan

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.)

September 11, 2012 in Political News, Scholarship, Tax | Permalink | Comments (16) | TrackBack (0)

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'

Bloomberg, Reality Check: Biden Misleads on Impact of Romney’s Tax Plan:

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.

September 7, 2012 in Political News, Scholarship, Tax | Permalink | Comments (4) | TrackBack (0)

Johnston: Romney, Ryan, and Tax-Free Living

Reuters:  Romney & Ryan on Tax, by David Cay Johnston:

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.

September 7, 2012 in Political News, Tax | Permalink | Comments (2) | TrackBack (0)

Thursday, September 6, 2012

Tax Foundation: Romney's Tax Plan Is Far Closer to Simpson-Bowles Than Obama's Tax Plan

Tax Foundation logoTax Foundation:  Romney, Obama, & Simpson-Bowles: How Do the Tax Reform Plans Stack Up?:

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.

Tax Foundation

September 6, 2012 in Political News, Tax, Think Tank Reports | Permalink | Comments (16) | TrackBack (0)

Report: Hackers Stole Mitt Romney's Tax Returns From PwC, Demand Ransom Payment

(Hat Tip: Bob Kamman.)

Update #1Glenn 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 #2Kay Bell (Don't Mess With Taxes):

I think it's a hoax because:

  1. 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.
  2. 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!

September 6, 2012 in Political News, Tax | Permalink | Comments (7) | TrackBack (0)

Wednesday, September 5, 2012

Tax Planks in Democratic Party Platform

2012 Democratic National Platform: Moving America Forward: DNC

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.

September 5, 2012 in Political News, Tax | Permalink | Comments (0) | TrackBack (0)

Monday, September 3, 2012

WaPo: Mitt Romney Exited Bain Capital With Rare Tax Benefits in Retirement

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.

September 3, 2012 in Political News, Tax | Permalink | Comments (3) | TrackBack (0)

Thursday, August 30, 2012

Romney Girl: 'Life Is Taxless'

Wednesday, August 29, 2012

Mitt Romney's Tax Mysteries: A Reading Guide

Pro Publica:  Mitt Romney’s Tax Mysteries: A Reading Guide:

Last week, the website Gawker published more than 900 pages of documents from Bain Capital, the private equity firm Mitt Romney founded, and headed from 1984 until 1999. The document dump didn't reveal much about Romney's personal investments, but it added a bit more to the pressure on Romney to release more of his tax returns. Romney and his wife Ann have repeatedly rebuffed such calls. In a primary debate in January, Romney said he'd paid "all the taxes that are legally required and not a dollar more."

So what do we know about how he avoided that extra dollar? For an overview of the questions surrounding Romney's tax strategies, see Vanity Fair's comprehensive story Where the Money Lives, and this [plus this] commentary from tax lawyers Edward Kleinbard and Peter Canellos. We've also rounded up the best reporting on the central controversies.

  • What's Been Disclosed?
  • Romney's Bain Career
  • Romney's Tax Rate
  • Overseas Accounting
  • Romney's Children's Trust
  • Romney's Enormous IRA
  • Blind Trusts
  • Rafalca the Horse

August 29, 2012 in Political News, Tax | Permalink | Comments (0) | TrackBack (0)

Feldstein: Romney's Tax Plan Can Raise Revenue

Wall Street Journal op-ed:  Romney's Tax Plan Can Raise Revenue, by Martin Feldstein (Harvard University, Department of Economics):

Mitt Romney's plan to cut taxes and offset the resulting revenue loss by limiting tax breaks has been attacked as "mathematically impossible." He would reduce all individual income-tax rates by 20%, eliminate the Alternative Minimum Tax and the estate tax, and limit tax deductions and loopholes that allow high-income taxpayers to reduce their tax payments. All this, say critics, would require a large tax increase on the middle-class to avoid raising the deficit.

Careful analysis shows this is not the case.

The critics' claims are based on calculations by the Tax Policy Center (update here) ... , which used a computer model to forecast personal tax revenue and AMT liabilities of taxpayers at each income level in 2015. Such forecasts are inevitably speculative.

To avoid the resulting uncertainties, I decided to analyze the Romney plan using the most recent IRS data, which is based on tax returns for 2009 and published in the current issue of the IRS quarterly publication. (Although 2009 was a low-income year because of the recession, using that year is preferable to looking back to some earlier period.) ...

Since broadening the tax base would produce enough revenue to pay for cutting everyone's tax rates, it is clear that the proposed Romney cuts wouldn't require any middle-class tax increase, nor would they produce a net windfall for high-income taxpayers. The Tax Policy Center and others are wrong to claim otherwise.

The Romney plan can reduce the current tax system's distortions, increasing national income in the short run and economic growth in the years ahead. That was the key to the very successful Reagan tax cuts of 1986. It was also the tax-reform strategy embraced by the bipartisan Bowles-Simpson commission in 2010. And it could put the economy back on the right track in 2013.

Update: Tax Vox Blog: Feldstein’s Analysis Doesn’t Refute TPC Findings, It Confirms Them:

Romney economic adviser Martin Feldstein attempts to contradict our finding. Instead, his analysis actually confirms our central result. Under the stated assumptions in Feldstein’s article, taxpayers with income between $100,000 and $200,000 would pay an average of at least $2,000 more.

August 29, 2012 in Political News, Tax | Permalink | Comments (5) | TrackBack (0)

Tuesday, August 28, 2012

Math, Taxes, and the War on Women

Monday, August 27, 2012

Tax Planks in 2012 Republican Platform

Republican Platform CoverTax Relief to Grow the Economy and Create Jobs

Taxes, by their very nature, reduce a citizen’s freedom. Their proper role in a free society should be to fund services that are essential and authorized by the Constitution, such as national security, and the care of those who cannot care for themselves. We reject the use of taxation to redistribute income, fund unnecessary or ineffective programs, or foster the crony capitalism that corrupts both politicians and corporations.

Our goal is a tax system that is simple, transparent, flatter, and fair. In contrast, the current IRS code is like a patchwork quilt, stitched together over time from mismatched pieces, and is beyond the comprehension of the average citizen. A reformed code should promote simplicity and coherence, savings and innovation, increase American competitiveness, and recognize the burdens on families with children. To that end, we propose to:

  • Extend the 2001 and 2003 tax relief packages—commonly known as the Bush tax cuts—pending reform of the tax code, to keep tax rates from rising on income, interest, dividends, and capital gains;
  • Reform the tax code by reducing marginal tax rates by 20 percent across-the-board in a revenue-neutral manner;
  • Eliminate the taxes on interest, dividends, and capital gains altogether for lower and middle-income taxpayers;
  • End the Death Tax; and
  • Repeal the Alternative Minimum Tax.

American Competitiveness in a Global Economy

American businesses now face the world’s highest corporate tax rate. It reduces their worldwide competitiveness, encourages corporations to move overseas, lessens investment, cripples job creation, lowers U.S. wages, and fosters the avoidance of tax liability— without actually increasing tax revenues. To level the international playing field, and to spur job creation here at home, we call for a reduction of the corporate rate to keep U.S. corporations competitive internationally, with a permanent research and development tax credit, and a repeal of the corporate alternative minimum tax. We also support the recommendation of the National Commission on Fiscal Responsibility and Reform, as well as the current President’s Export Council, to switch to a territorial system of corporate taxation, so that profits earned and taxed abroad may be repatriated for job-creating investment here at home without additional penalty.

Fundamental Tax Principles

We oppose retroactive taxation; and we condemn attempts by activist judges, at any level of government, to seize the power of the purse by ordering higher taxes. We oppose tax policies that divide Americans or promote class warfare.

Because of the vital role of religious organizations, charities, and fraternal benevolent societies in fostering benevolence and patriotism, they should not be subject to taxation, and donations to them should continue to be tax deductible.

In any restructuring of federal taxation, to guard against hypertaxation of the American people, any value added tax or national sales tax must be tied to the simultaneous repeal of the Sixteenth Amendment, which established the federal income tax.

August 27, 2012 in Political News, Tax | Permalink | Comments (6) | TrackBack (0)

Romney Tax Returns Show Strategy for Moving Money to Kids

Bloomberg:  Romney Tax Returns Show Strategy for Moving Money to Kids:

Republican presidential candidate Mitt Romney and his wife, Ann, have used sophisticated estate- planning techniques for more than a decade to minimize taxes and amass at least $100 million for their family outside of their estate.

The couple created trusts as early as 1995, when Romney was building wealth as chief executive officer of Bain Capital LLC. They packed one for their children with investments that stood to appreciate and set up another for charity that provides a tax deduction and income. The candidate’s retirement account, valued at as much as $87.4 million, may benefit his heirs for decades. “It’s beneficial for your kids and grandkids to push the money downstream,” said David Scott Sloan, chairman of the national private wealth services estate-planning practice at the law firm Holland & Knight LLP in Boston. “The Romneys appear to be doing things that are similar to what other high-net-worth families do.”

Wealthy couples use strategies allowed under the federal tax system such as moving assets to trusts so that the money may be subject to little or no gift and estate taxes, Sloan said. The Romney family trust is worth $100 million, according to the campaign. That money isn’t included in the couple’s personal fortune, which the campaign estimates at as much as $250 million.

August 27, 2012 in Political News, Tax | Permalink | Comments (2) | TrackBack (0)

Romney Reaped Huge Tax Benefits From 'Active' Role at Bain Capital

Huffington Post:  Mitt Romney Reaped Huge Tax Benefits Based on 'Active' Role at Bain Capital:

When tax experts charged that he benefited from legally dubious tax avoidance strategies employed by Bain, his campaign noted that the investments are kept in a blind trust completely out of his control. ...

But according to his 2010 tax return, when the IRS comes calling in April, Romney has a different answer: The presumptive GOP nominee reaps lucrative tax breaks for "active" participation in the private equity firm he founded, as well as a host of other investments. ... For tax purposes, he claims an active status; for political purposes, he claims to have zero to do with the investments. ...

The distinction is valuable, for the IRS treats passive and active income and losses differently. If a passive investment loses money, the taxpayer can only write off that loss if passive gains have also been made and only at a 15% rate. But active losses can be written off at a 35% rate and deducted from the taxpayer's ordinary income. In other words, a taxpayer wants active losses, not passive losses. So by describing many of his investments as active, Romney saves himself millions of dollars in taxes.

With those active investments, he is also securing a tax break few Americans enjoy: When he wins, he's paying a 15% rate on the gain. When he loses, he's writing it off at 35%, meaning that tax policy is subsidizing Romney's risk in his Bain investments. In other words, Romney didn't build that, at least not without taxpayer backing. ... These kinds of deductions are only available to "active" participants in business partnerships. While Romney filed as an active participant for tax purposes, there is no evidence that he took part in Bain management decisions in 2010, and he has denied doing so. ...

"Governor Romney appears to be saying one thing to the American people and one thing to the IRS," Rep. Brad Miller (D-N.C.) said to The Huffington Post. "Right now we are just seeing inconsistent statements. The American people are entitled to know more than that. If there's a legalistic distinction, we are entitled to know what that is. ... Has he played too close to the line or over the line?"

It is also possible that these deductions are all legitimate expenses for Bain and the handful of Goldman Sachs subsidiaries in which Romney is a partner. But they all appear on a tax document where individuals usually list personal expenses, known as Schedule E. And listing personal expenses as business expenses is not allowed.

(Hat Tip: Francine Lipman.)

August 27, 2012 in Political News, Tax | Permalink | Comments (2) | TrackBack (0)

Sunday, August 26, 2012

NY Times: Two-and-Twenty Tax Dodges

New York Times editorial:  Two-and-Twenty Tax Dodges:

Mr. Romney and his partners may have abused the tax system by paying far less in taxes than they should have.

Back in 2007, The New York Times published an editorial that explained what was wrong with the tax treatment of Bain-like pay. It cited the work of Victor Fleischer, a law professor at the University of Colorado, who had written a let-us-count-the-ways report on how private equity partners avoid taxes [Two and Twenty: Taxing Partnership Profits in Private Equity Funds, 83 N.Y.U. L. Rev. 1 (2008)].

In a nutshell, they collect a management fee on their funds of 2%, which is supposed to be taxed as ordinary income. And they collect performance fees, usually 20% of any profits, which – thanks to a loophole that should have been closed long ago – are taxed as capital gains, at a mere 15%, about the lowest rate in the tax code.

It is no secret that Mr. Romney has availed himself of the super-low capital gains rate on his Bain performance-fees – an obscene privilege, but not illegal. What the Gawker documents indicate is that the Bain/Romney tax avoidance went further than that.

In brief, it looks like four Bain funds in which the Romney family’s trusts are invested converted $1.05 billion in management fees — which should be taxed as ordinary income – into capital gains, which are taxed at the much lower rate. The tax savings: $220 million.

Mr. Fleischer was all over it, writing on his blog that “the Bain partners, in my opinion, misreported their income if they reported those converted fees as capital gains instead of ordinary income.” What would the IRS say? It is unclear, but Mr. Fleischer says the practice is illegal and has no doubt a court would agree if ever asked to rule on the question. What does Mr. Romney say? The campaign declined to comment.

August 26, 2012 in Political News, Tax | Permalink | Comments (0) | TrackBack (0)

NY Times: Tax Credits Shed Light on Romney

New York Times:  Tax Credits Shed Light on Romney, by James B. Stewart:

The presumptive Republican presidential nominee’s refusal to disclose more than his most recent two years of tax returns has spawned wide-ranging and sometimes far-fetched speculation from water coolers to talk shows. But a few tax experts are zeroing in on an esoteric corner of the tax code and pointing to some intriguing clues buried in the returns Mr. Romney has already revealed.

Mr. Romney has insisted that his returns from 2010, and preliminary returns for 2011 (until he provides a final version) are enough for voters to evaluate his fitness for office. But even though he has not released his returns from earlier years, the 2010 return sheds some light on those years.

That’s because Mr. Romney paid income tax to foreign countries, and as result claimed in 2010 a $129,697 foreign tax credit, which he used to offset taxes he owed in the United States. American taxpayers who claim the foreign tax credit are required to report their total foreign taxes paid and tax credits used for the previous 10 years. So that return contains foreign tax data going back to 2000.

The good news for Mr. Romney is the forms suggest that he paid at least some federal income tax every year, as he has said he did. He used the foreign tax credit every year to offset his taxes in the United States, and American taxpayers can’t use a tax credit if they owe no federal income tax. This casts even more doubt on the claim by the Senate majority leader, Harry Reid, attributed to an unnamed Bain Capital source, that Mr. Romney paid no income taxes during that time.

But the data does suggest that Mr. Romney was able to reduce his taxable income in 2009 to a very low level, and thus might have paid relatively little tax — even if it did, as Mr. Romney claims, amount to at least 13 percent of his taxable income. ...

Mr. Romney’s return shows how wealthy Americans with foreign earnings can sharply reduce their tax liability in the United States. In 2010 Mr. Romney reported $2.73 million of gross foreign income. On that amount, he paid foreign taxes of $67,173, or just 2.5 percent of his gross foreign income.

After all his deductions (including the kind of noncash charges that are central to all tax shelters, like depreciation) that multimillion-dollar sum declines to just $392,000 in taxable income. This amount appears on his federal tax return, but at his 13.9 percent effective rate, the federal tax on that income — $54,627 — was more than offset by a $129,697 tax credit for foreign taxes he paid in 2010 and earlier years.

Dan Shaviro (NYU), Has Romney Pid All the U.S. Federal Income Taxes That He Legally Owes?:

As usual, I feel half-apologetic about the degree of speculation that I am engaging in here.  But it's Romney's unprecedented tax return secrecy, and the inferences reasonably derived from it, that makes such speculation necessary.

August 26, 2012 in Political News, Tax | Permalink | Comments (1) | TrackBack (0)

Saturday, August 25, 2012

WSJ: A Clue Emerges to Romney’s Gift-Tax Mystery

Wall Street Journal:  A Clue Emerges to Romney’s Gift-Tax Mystery, by Mark Maremont:

One of the mysteries surrounding Mitt Romney’s taxes is how the former private-equity executive managed to get $100 million into a family trust for his children without incurring federal gift taxes.

A potential clue may be found in a previously unreported 2008 presentation made by a partner at law firm Ropes & Gray LLP, which represents the GOP presidential nominee. It focuses on how private-equity executives could minimize gift and estate taxes by giving family members some of their “carried interest” rights, a major form of compensation that entitles private-equity executives to a slice of the firm’s future investment profits. ...

The attorney at Ropes & Gray wrote that in the 1990s and early 2000s estate-planning lawyers “commonly advised” that executives could claim a value of zero on these transfers of carried-interest rights for federal gift-tax purposes. He said the practice ended by 2005.

Gifts of carried-interest rights are common, but several estate-planning attorneys at major New York firms said they are puzzled by the claim that the rights ever could have been valued at zero, particularly at an established private-equity firm. They said long-standing rules require taxpayers to value all gifts at fair-market value, or what a willing buyer would pay a willing seller.

In response to a reporter’s questions, a Romney adviser said the presentation by the Ropes & Gray lawyer was aimed at educating other attorneys about industry practices, not a description of Ropes & Gray’s advice to clients. Based on the presentation, the adviser said, “you should not assume” that was the firm’s advice to clients or that Mr. Romney’s gift-tax returns ever valued carried-interest rights at zero. ...

Jay Waxenberg, an estate-planning attorney at Proskauer Rose LLP in New York who advises private-equity executives, said valuations “tend to be very low,” but he has never known anybody at an established firm claim a zero value. ...

In his 2008 presentation, the law firm partner, Marc J. Bloostein, said the basis for believing that carried-interest rights could have a zero gift-tax value stemmed partly from a 1993 IRS ruling related to income tax treatment of the rights. [Rev. Proc. 93-27, 1993-2 C.B. 343,] The IRS said taxpayers could claim the rights had no immediate value when they were received, but would have to pay capital-gains tax on any income that later flowed from them.

Mr. Bloostein indicated that gift-tax valuation practices changed by 2005, saying that although there was once “reason to think” that a zero valuation could be claimed, “it has become clear” that fair-market value is the correct standard and “it is advisable to engage a professional appraiser.”

August 25, 2012 in Political News, Tax | Permalink | Comments (3) | TrackBack (0)

Friday, August 24, 2012

Confidential Bain Financial Documents Released on Romney Family Trust Investments

New York Times, Documents Show Details on Romney Family Trusts:

Hundreds of pages of confidential internal documents from the private equity firm Bain Capital published online Thursday provided new details on investments held by the Romney family’s trusts, as well as aggressive strategies that Bain appears to have used to minimize its investors’ and partners’ tax liabilities.

The documents include annual financial statements and investor letters circulated to limited partners in more than 20 Bain and related funds where Mitt Romney’s financial advisers have at times invested large parts of his personal fortune, estimated at more than $250 million.

The documents, obtained and published by, do not specify the stakes held in the funds by the Romney family trusts or by other investors. But they highlight the range and complexity of Mr. Romney’s investments at a time when those very qualities have been the subject of the Obama campaign’s main attacks against him, including demands that Mr. Romney release his tax returns to clear up any suggestion that he might be benefiting financially from legal loopholes or tax shelters.

Many documents disclose information that, while routinely provided to Bain’s investors, is not typically disclosed to the public: the dollar value of Bain investments in specific companies, fees charged by Bain and other investment managers, and the value of different Bain funds in some years....

Bain private equity funds in which the Romney family’s trusts are invested appear to have used an aggressive tax approach, which some tax lawyers believe is not legal, to save Bain partners more than $200 million in income taxes and more than $20 million in Midicare taxes.

Annual reports for four Bain Capital funds indicate that the funds converted $1.05 billion in accumulated fees that otherwise would have been ordinary income for Bain partners into capital gains, which are taxed at a much lower rate.

Although some tax experts have criticized the approach, the Internal Revenue Service is not known to have challenged any such arrangements.

In a blog post Thursday, Victor Fleischer, a law professor at the University of Colorado, said that there was some disagreement among lawyers, but that he believed: “If challenged in court, Bain would lose. The Bain partners, in my opinion, misreported their income if they reported these converted fees as capital gain instead of ordinary income.”...

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, called the tax strategy “extremely aggressive” and said it was “subject to serious challenge by the IRS.”

August 24, 2012 in Political News, Tax | Permalink | Comments (1) | TrackBack (0)

Tuesday, August 21, 2012

Bartlett: Exploring Mitt Romney’s Taxes and Tax Plan

New York Times:  Exploring Mitt Romney’s Taxes and Tax Plan, by Bruce Bartlett:

An examination of the two years of tax returns that the Republican presidential nominee Mitt Romney has made public sheds light on some fundamental concepts of taxation that illuminate his proposed tax cut. These include the meaning of “taxes” and “income.”

For most people, income is simple: it means wages or perhaps a pension or Social Security benefits. Income from capital – dividends, interest, rent and capital gains – seldom enters into the calculation. The vast bulk of such income is earned by the ultrawealthy, like Mr. Romney. ...

This is the key reason that Mr. Romney paid a federal income tax rate of 13.9% in 2010 and 15.4% in 2011. By contrast, his running mate, Representative Paul D. Ryan of Wisconsin, paid a rate of 15.9% in 2010 and 20% in 2011, despite an income that was 10% of Mr. Romney’s in 2010 and 15% in 2011. ...

The distribution of income is extremely relevant for Mr. Romney tax plan. He has said that he will close enough tax loopholes so that the wealthy will pay the same share of taxes they are paying now, even though he will cut their income tax rates by 20%. However, he has also said that the current low rates on dividends and capital gains, which expire at year’s end, will be made permanent. Thus Mr. Romney would preserve exactly those provisions of the tax code most responsible for millionaires like himself paying tax rates considerably lower than those with a fraction of his income, like Mr. Ryan. ...

The Tax Policy Center recently concluded that Mr. Romney’s numbers don’t add up. Either he will greatly increase the deficit or he will have to raise taxes on the middle class to maintain revenue neutrality. Even if every deduction, exclusion and credit for the wealthy was abolished, their taxes would still go down under Mr. Romney’s plan. Democrats have said that the Romney tax plan would raise taxes on the middle class. While this is logically consistent with what Mr. Romney has said about his plan, I do not believe that is his intention or what will happen if he is elected president. Rather, I think he and his advisers simply made up a proposal that was everything to everybody without bothering to check for internal consistency.

For someone who has made his business acumen and expertise with finance a cornerstone of his presidential run, that Mr. Romney’s signature campaign proposal doesn’t add up may be the most telling fact voters need to know about him. 

August 21, 2012 in Political News, Tax | Permalink | Comments (3) | TrackBack (0)

Kleinbard: Paul Ryan's Tax Roadmap to Inequality

Edward D. Kleinbard (USC), Paul Ryan's Roadmap to Inequality:

The purest articulation of Paul Ryan’s fiscal belief system is his 2010 Roadmap for America’s Future. The tax provisions of this extensive proposal would convert the current personal and corporate income taxes into two consumption taxes, and repeal the gift and estate tax.

This report explains how the Roadmap, like Herman Cain’s 9-9-9 Plan, would operate in practice like a large new payroll tax. The Roadmap would directly immunize the highest labor income earners from this tax through a large reduction in the top rate of the Roadmap’s labor earnings tax, compared with current law or policy. Unlike the 9-9-9 Plan the Roadmap further would largely immunize “old” capital from the efficient (if arguably unfair) imposition of consumption tax when that capital was consumed, by providing a write-off of existing depreciable basis. And finally the Roadmap would reduce the tax burdens on the most affluent capital owners further by eliminating the gift and estate tax.

For these reasons, it is not surprising that the Roadmap contemplates an extraordinarily large redistribution of tax burdens from the affluent to middle-class and lower income Americans. For middle-class families, tax burdens would increase on the order of 50 percent. At the same time, the Roadmap’s reprioritization of government spending also would be regressive in its impact. Proponents of the Roadmap or plans like it must explain how any projected increase in economic growth will compensate the majority of Americans for shouldering more tax burdens while receiving smaller government benefits.

August 21, 2012 in Political News, Tax | Permalink | Comments (0) | TrackBack (0)