Friday, September 21, 2012
Mitt Romney today released his 2011 tax return (FAQ). Curiously, the 2011 estimated return released in connection with Romney's extension reported $20,901,075 AGI, over $7 million more than the $13,696,951 AGI reported on his 2011 return as filed. $1.75 million of that amount represents a foregone charitable deduction:
- The Romneys donated $4,020,772 to charity in 2011, amounting to nearly 30% of their income.
- The Romneys claimed a deduction for $2.25 million of those charitable contributions.
- The Romneys’ generous charitable donations in 2011 would have significantly reduced their tax obligation for the year. The Romneys thus limited their deduction of charitable contributions to conform to the Governor's statement in August, based upon the January estimate of income, that he paid at least 13% in income taxes in each of the last 10 years.
The campaign also released a statement from PriceWaterhouseCoopers on the Romneys’ tax filings over 20 years, from 1990 – 2009:
- In each year during the entire 20-year period, the Romneys owed both state and federal income taxes.
- Over the entire 20-year period, the average annual effective federal tax rate was 20.20%.
- Over the entire 20-year period, the lowest annual effective federal personal tax rate was 13.66%.
- Over the entire 20-year period, the Romneys gave to charity an average of 13.45% of their adjusted gross income.
- Over the entire 20-year period, the total federal and state taxes owed plus the total charitable donations deducted represented 38.49% of total AGI.
The Romney campaign also released this letter from former IRS Commissioner (and current Skadden partner) Fred Goldberg:
These returns reflect the complexity of our tax laws and the types of investment activity that I would anticipate for persons in their circumstances. There is no indication or suggestion of any tax-motivated or aggressive tax planning activities. In my judgment, they have fully satisfied their responsibilities as taxpayers. They have done so by relying on a highly reputable return preparer and other advisors, who have in turn relied primarily on information provided by third parties to them and to the IRS. The end result of that process has been returns that include a multitude of schedules, IRS forms and accompanying statements that provide appropriate transparency and the proper payment of taxes that Governor and Mrs. Romney owe under current law.
Wednesday, September 19, 2012
John O. Fox, 10 Tax Questions the Candidates Don't Want You to Ask:
The Ten Tax Questions:
- The McMansion Tax Break
- The Inequitable Home Equity Break
- Poorest Families, Poorest Child Care
- Social Security’s Insecurity
- A Sick Policy on Health Insurance
- The Oh-So-Golden-Years Pension Break
- The Great Pension Robbery
- Higher Education Denied
- Medicare’s Plunge Toward Insolvency
- Single and Paying For It
The Five Common Tax Myths and Misperceptions:
Tuesday, September 18, 2012
- Mother Jones: Secret Video: Romney Tells Millionaire Donors What He REALLY Thinks of Obama Voters
- Linda Beale (Wayne State): Romney's Tax Views Lead to Blooper Comments Denigrating America's Elderly and Poor
- Kay Bell (Don't Mess With Taxes): 47 Percent Don't Pay Federal Income Taxes, but Do Hand Over Payroll, Other Taxes
- Len Burman (Syracuse), In Mitt's World, My Limo Driver is Not Trying Hard Enough
- Ezra Klein (Washington Post): Mitt Romney Versus the 47 Percent
- Paul Krugman (New York Times): Taxes Over the Life Cycle
- Annie Lowrey (New York Times): The Reasons Behind the ‘People Who Pay No Income Tax’
- Annie Lowrey (New York Times): Who Pays and Who Takes
- Janet Novack (Forbes): Memo to Mitt Romney: The 47% Pay Taxes Too
- Catherine Rampell (New York Times): How Do the 47% Vote?
- Dan Shaviro (NYU): Romney's Erroneous Equation
- Dan Shaviro (NYU): Romney Versus the "47 Percent"
- Dan Shaviro (NYU): Was Romney in the 47 percent (in 2009 or Any Earlier Year)?
- Angry Bear: Who Are the 47%? And the Irony Might be Remarkable
- Bloomberg: Romney’s 47% Paying No Taxes Combines Elderly With Poor Workers
- Center on Budget & Policy Priorities: Misconceptions and Realities About Who Pays Taxes
- The Maddow Blog: Why the '47 Percent' Is So Large
- NPR, The 47 Percent, in One Graphic
- Tax Foundation: How Much do Nonpayers Earn?
- Tax Policy Center: Who Doesn't Pay Federal Taxes
- Tax Update Blog: 47% Frenzy!
- Tax Vox Blog: Why Do People Pay No Federal Income Tax?
- U.S. News & World Report: Romney's 47% Statistic Has Been Used by Conservatives For Years
- Wall Street Journal: The Data Behind Romney’s 47% Comments
Friday, September 14, 2012
There is no evidence that Mr. Romney has violated the law. The principal means he used to pay low taxes on his hundreds of millions of dollars in income was the technique known as carried interest, which allows managers of private equity funds to treat most of the fees they receive for running the funds as capital gains rather than ordinary income.
The technique strikes some -- including President Obama -- as outrageous, but it is legal under current law. Unless and until the Congress changes the law, Mr. Romney has every right to take advantage of the technique.
But there is a related tactic to avoid taxes that is used by some private equity firms, including Bain Capital, whose legality is less clear. The IRS has not challenged it -- at least not publicly -- but some legal scholars say it is not justified, and some private equity firms have not chosen to use it.
The fact that Bain uses the technique became public last month when the Gawker Web site posted annual reports from a number of Bain funds in which Mr. Romney, or his family trusts, have interests. It is clear that some Bain partners saved hundreds of millions of dollars in taxes from its use, but the Romney campaign says he did not benefit from it personally. ... It concerns the management fees that sponsors of private equity funds, such as Bain Capital, are paid. Those fees are separate from the fund profits that the managers are able to treat as carried interest.
Instead of paying ordinary income taxes on those fees, the partners and employees of the fund sponsors pay taxes at much lower capital gains rates. In fact, they do even better than that. In some cases, they defer paying those capital gains taxes for years, itself a substantial benefit.
How good a deal is that? Annual reports from 2009 for four Bain funds showed that over the years the funds converted $1.05 billion in management fees from ordinary income into capital gains.
That directly benefited the Bain partners who shared in the management fees. Assuming they paid the capital gains tax of 15%, rather than the ordinary income tax rate of 35%, they saved about $210 million in income taxes and $28 million more in Medicare taxes.
Some tax experts think the IRS could win if it challenged the practice.
“It is not legal,” said Victor Fleisher, a tax law professor at the University of Colorado, in an interview this week. He noted that different money managers used variations, some of which he said were less likely than others to withstand an audit. “Bain,” he said, “is on the aggressive end of this.”
In an article that appeared in the journal Tax Notes in 2009, Gregg D. Polsky, a tax law professor at the University of North Carolina School of Law who formerly worked in the IRS office of chief counsel, said he believed the IRS had good arguments that would be likely to prevail in court.
In a statement issued by the Romney campaign, Brad Malt, the trustee for Romney’s blind trusts, said the tactic was “a common, accepted and totally legal practice,” although Mr. Romney had never used it personally....
It is quite possible that the maneuver is legal under current tax law, and that Bain and Apollo acted completely appropriately to arrange their affairs to make the taxes owed by their partners and employees as low as possible. Even if the IRS and the courts eventually concluded otherwise, that would not indicate the funds had done anything wrong in asserting the position.
But it is hard for me to see the difference between that and an arrangement under which my employer invested, on my behalf, money that it would otherwise have to pay me for writing this column. Then I would tell the I.R.S. that I owed no taxes until I liquidated the investment, and even then would pay only capital gains rates.
If I tried that, I could not get away with it. If the law lets those who work in private equity do it, Congress should change the law.
At the same time, it should end the carried-interest dodge. Managers are being paid for their services when they receive a share of profits from the fund. The amount may be based on profits, but that is no different from the situation at normal companies that pay bonuses based on company earnings. It is compensation, and should be taxed as such.
Mr. Romney’s former colleagues in private equity may come to regret his candidacy, whether or not he wins. Few in the public understood this particular maneuver before the Bain reports were disclosed. Now many do. If and when Congress decides to reform the tax law, this area is likely to be a prime target.
(Hat Tip: Mike Talbert.)
Thursday, September 13, 2012
One of the services of the Simpson-Bowles Commission was to set out a path for tax reform, with lower income tax rates and removal of many tax preferences or, to use the commission's term, tax expenditures.
It's an approach that has been tried before and worked. Ronald Reagan called for such a reform in 1984 and, after much negotiating, it was hammered out in 1986. Lead roles were played by Treasury Secretary James Baker; the Democratic chairman of the House Ways and Means Committee, Dan Rostenkowski; and the Republican chairman of the Senate Finance Committee, Bob Packwood. ...
Mitt Romney has endorsed a similar procedure. So has Paul Ryan, who included it in the budget he steered to passage in the House.
Romney and Ryan have been criticized for not providing specifics on which tax preferences they would eliminate. But neither did the Simpson-Bowles Commission, which said that "the precise details and exact transition rules should be worked out in a variety of ways by the relevant congressional committees and the Treasury Department." That's how it worked in 1984-'86. ...
The biggest obstacle to 1986-style tax reform is Barack Obama. In his acceptance speech, he reiterated his call for higher tax rates on high earners.
That's as much of a deal killer for Republicans as his late-in-the-day insistence on $400 billion in additional revenues in the August 2011 grand bargain negotiations, documented once again in Bob Woodward's "The Price of Politics." ... Woodward reports that during the grand bargain negotiations, congressional leaders of both parties voted Obama "off the island." Voters who want Simpson-Bowles-type tax reform can do that in November.
Wednesday, September 12, 2012
In a taped interview, host [Meet the Press host] David Gregory repeatedly asked Romney for details of his tax plan. He ended up practically begging for just one detail – any morsel, please. He got zip, zilch, nothing. I don’t care that much about Romney’s personal income tax returns. I can even think of several legitimate reasons why he wouldn’t want to release them. ... But I can think of only one reason why Romney consistently won’t reveal the details of his tax plan. He doesn’t have any! Other than to take care of his rich friends. ...
Meanwhile, back at re-election central, President Obama in his convention acceptance speech last week said that he wants to work for tax reform. No he doesn’t. His first term amply illustrated what I was worried about all along: President Obama doesn’t care a lick about tax reform – which is his perogative, by the way. All he cares about is increasing taxes on the folks he thinks are rich – which actually includes a lot of middle-class households.
From a tax policy standpoint, the choice we have in this upcoming presidential election makes me sick to my stomach.
(Hat Tip: Going Concern.)
Tuesday, September 11, 2012
Harvey S. Rosen (Princeton University, Department of Economics), Growth, Distribution, and Tax Reform: Thoughts on the Romney Proposal:
Governor Romney has proposed a personal income tax reform that would lower marginal tax rates and broaden the tax base. Critics of the proposal have argued that high-income taxpayers would receive a tax cut, and given that the proposal is meant to be revenue neutral, this would inevitably lead to increased taxes for families with low and moderate incomes. Because the Romney proposal does not specify in detail just what tax preferences might be eliminated or scaled back in order to broaden the tax base, much of the debate over it has focused on what provisions would be politically and administratively feasible.
While this discussion has been illuminating in some respects, something seems to be missing. Relatively little has been said about the possible effects of the Romney proposal on economic growth. This is curious because increasing growth is the motivation for the proposal in the first place.
In this paper, I analyze the Romney proposal taking into account the additional income that might be generated by economic growth. The main conclusion is that under plausible assumptions, a proposal along the lines suggested by Governor Romney can both be revenue neutral and keep the net tax burden on high-income individuals about the same. That is, an increase in the tax burden on lower and middle income individuals is not required in order to make the overall plan revenue neutral.
(Hat Tip: Greg Mankiw.)
Friday, September 7, 2012
Biden Mischaracterizes Clausing Study in Claim That Romney's Territorial Tax Plan Would 'Create 800,000 Jobs, All of Them Overseas'
The Claim: Biden said in his prepared remarks that Republican presidential candidate Mitt Romney “has a new tax proposal -- the territorial tax -- that experts say will create 800,000 jobs, all of them overseas.”
The Background: Romney has proposed changing the basic principles of the U.S. international tax system. Under current law, companies owe U.S. taxes on the profits they earn around the world. They receive tax credits for payments to foreign governments and don’t have to pay U.S. taxes until they bring the money home. U.S.-based companies with substantial overseas operations keep profits overseas to avoid taxation here. Romney wants the U.S. to adopt a territorial tax system under which companies would owe little or no taxes on their overseas income.
The Facts: Biden overstated the case. His 800,000 jobs number is based on a study conducted by one expert, Kimberly Clausing, an economics professor at Reed College in Portland, Oregon. Her July analysis [A Challenging Time for International Tax Policy, 136 Tax Notes 281 (July 16, 2012)] examined the effects of a “pure” territorial system under which U.S. companies would face no domestic taxes on their foreign income. ...Clausing’s study doesn’t say that no jobs would be created in the U.S. Instead, it says that a pure territorial tax plan would increase employment by U.S. companies in low-tax countries.
Biden's claim apparently is based on this paragraph from the article:
Based on my research and that of other experts in international taxation, it is possible to estimate how many jobs are at stake in this debate. In 2008 U.S. multinational firms employed 10 million workers in affiliated firms abroad. Under a pure territorial tax system, the tax incentive to locate jobs in low-tax countries would increase significantly, which I calculate would increase employment in low-tax countries by about 800,000 jobs.
Together Mitt Romney and Paul Ryan have put human faces on how the super-rich game the tax system to pay less, pay later and sometimes not pay at all. Both want to expand tax favors for the already rich, like themselves.
Their approach favors dynastic wealth with largely tax-free (Romney) or completely tax-free (Ryan) lifestyles, encouraging future generations of shiftless inheritors. What we need instead is a tax system that encourages strivers in competitive markets, not a perpetual oligarchy.
Romney and Ryan say that lowering tax rates and reducing or eliminating taxes on capital gains and dividends, while letting huge fortunes pass untaxed to heirs, will boost economic growth and mean prosperity for all.
We already tried parts of that, starting with Ronald Reagan in 1981 and doubling down with George W. Bush in 2001. Empirical result: Flat to falling incomes for the vast majority, weak job growth, but skyrocketing incomes for the top one percent of the top one percent, including Romney. ...
[F]undamental tax reform ... honors the time-tested -- and therefore profoundly conservative -- principle of making those who gain the most from society bear the heaviest burden. Romney and Ryan would shove that burden onto those with less, a radical plan by an oligarch and his partner in promoting tax-free living for the richest Americans.
Thursday, September 6, 2012
Among the tax reform plans of the major presidential candidates, Mitt Romney’s proposal to lower rates and eliminate credits and deductions comes far closer than that of President Obama to the widely-praised and bipartisan framework of the Simpson-Bowles tax reform commission.
Mitt Romney’s plan aims for a Simpson-Bowles style reform, with lower rates and fewer tax expenditures, but without additional penalties on saving and investing. The top rate on personal income would be 28% and the bottom rate would be 8%, making the rate structure more progressive than under Simpson-Bowles. In terms of tax expenditures and simplification, Romney has said he would target credits and deductions for “people at the high end” while preserving some preferences targeted at the middle-class such as deductions for mortgage interest and charitable giving.
President Obama’s tax plan, however, is largely at odds with any commonly held notion of tax reform, including Simpson-Bowles. It would result in dramatically higher tax rates, on the order of 50% to 90% higher than the Simpson-Bowles rates on personal income and investment income. While the president has voiced support for eliminating tax expenditures, his specific proposals tend to add more than are taken away, although he has proposed limiting them for high-income earners. Not only does this fail to simplify the tax code, it fails to spur the economy, ultimately resulting in insufficient tax revenue and perpetual deficits.
Real tax reform would produce a tax code that is simple and treats all taxpayers equally. It would also treat all consumption equally, whether that consumption occurs now or, as a result of saving, later. This would best be accomplished by lowering tax rates on saving and investment to match the current zero tax rate on consumption.
- Going Concern
- Huffington Post
- U.S. News & World Report
- Wall Street Journal
(Hat Tip: Bob Kamman.)
Update #1: Glenn Reynolds (Tennessee):
UPDATE: In the comments, a suggestion that this is just a cover story: “As many observers have noted, there’s little question the Obama campaign has Romney’s tax returns. That’s illegal, though -- they had to have been obtained from the government, which indeed is Nixon territory -- so there will have to be some cover story when they are inevitably leaked prior to the election. The Reid nonsense was a start, maybe this is the vehicle.”
ANOTHER UPDATE: Quite a few commenters with tax experience say this is bogus. But reader Mark Jones writes:
It’s not just that the so-called hackers could provide cover for releasing Romney’s tax returns obtained (illegally) by the Obama administration. It’s that they could release PHONY returns showing blatantly illegal or unethical actions on Romney’s part and then, when Romney protests, demand that he prove it by releasing the real returns. The “hackers” provide plausible deniability on two levels: First, “We thought they were the real thing”, and second, “Of course we didn’t obtain his records unlawfully. We didn’t even get the real thing!”
Update #2: Kay Bell (Don't Mess With Taxes):
I think it's a hoax because:
- The ransom amount is pretty low given the information allegedly stolen. Romney is astoundingly rich and the donors who support him are no slouches in the wealth department either. If the candidate's tax returns were stolen they probably would be happy to pony up much, much more to keep them private.
- The deadline is too far down the line. Not that I'm a cybercriminal, but if I had the info, I'd give them a day or two to come up with the money. Giving them three and a half weeks to investigate seems to be asking to be caught. I would get in, get the data, get the money and then get out!
Wednesday, September 5, 2012
We are committed to defeating efforts that would return us to the failed economic policies of the past, in which tax relief for the wealthy explodes the deficit and asks the middle class to shoulder that burden.To help spur economic growth, President Obama and the Democratic Party cut taxes for every working family – providing $3,600 in tax relief to the typical family over the President’s first term in office – and we are committed to extending the middle class tax cuts for the 98 percent of American families who make less than $250,000 a year, and we will not raise taxes on them.
In order to reduce the deficit while still making the investments we need in education, research, infrastructure, and clean energy, the President has asked for the wealthiest taxpayers to pay their fair share. We have to cut what we don’t need in order to make room for the things we do need to grow our economy. We support allowing the Bush tax cuts for the wealthiest to expire and closing loopholes and deductions for the largest corporations and the highest-earning taxpayers. We are committed to reforming our tax code so that it is fairer and simpler, creating a tax code that lives up to the Buffett Rule so no millionaire pays a smaller share of his or her income in taxes than middle class families do. We are also committed to reforming the corporate tax code to lower tax rates for companies in the United States, with additional relief for those locating manufacturing and research and development on our shores, while closing loopholes and reducing incentives for corporations to shift jobs overseas.The Republican Party has a different vision—instead of asking everyone to do their fair share and making investments we need for an economy built to last, they would slash taxes for corporations and the wealthiest Americans, let Wall Street once again write its own rules, and balance the budget on the backs of the middle class. Romney and Congressional Republicans share the same, distorted view of the economy and support the same, lopsided budget. Romney would roll back the tax relief Democrats provided to working families and college students, and would require massive new taxes on the middle class to pay for his $5 trillion tax plan that primarily benefits the wealthy. The Democratic Party opposes efforts to give additional tax cuts to the wealthiest Americans at the expense of the middle class and investments in our future.
Monday, September 3, 2012
Washington Post, Mitt Romney Exited Bain Capital With Rare Tax Benefits in Retirement:
Before Mitt Romney retired from Bain Capital, the enormously profitable investment firm he founded, he made sure to lock in his gains, both realized and expected, for years to come.
He did so, in part, the way millions of other Americans do — with the tax benefits of an individual retirement account. But he was able to turbocharge the impact of those advantages and other tax breaks in his severance package from Bain in a way that few but the country’s super-rich can ever hope to do.
As a result, his IRA could be worth as much as $87 million, according to his estimates, and he can continue to earn tax-advantaged income from Bain more than a decade after he formally left the firm. ...
Romney’s former colleagues say his retirement package is a well-justified reward for a chief executive who built Bain from scratch in 1984 into a financial powerhouse that backed business successes such as Staples and the Sports Authority.
The structure and tax treatment of his retirement, including the IRA, was legally sound and appropriate, they say, adding that he has earned less money over his career than some other top private-equity executives, who earned billions of dollars during the same period.
Details of Romney’s retirement assets are somewhat vague because he has released only one year of full tax returns and declined to provide additional specifics about his personal finances. But interviews with Bain executives and accounting professionals show that he was able to take advantage of tax benefits in innovative ways open only to a narrow slice of extremely affluent people — mostly those who work in private-equity firms and other investment partnerships.
His severance package, for instance, allowed him to continue sharing in the profits of the company as if he were still a partner managing it, according to his 2010 tax return and interviews with present and former Bain executives. And because he benefited from the firm’s investments as if he were an active Bain partner, he paid taxes at a lower rate on these earnings than if they were treated as ordinary retirement income. Romney negotiated the package when he was leaving the firm, Bain executives said, while he set up his IRA long before. ...
Michael Graetz, who served in the Treasury Department under President George H.W. Bush, said massive IRAs such as Romney’s do not reflect the intent of the laws that created the accounts as a way to help working Americans reach financial security. “One need not have $100 million in an IRA in order to accomplish retirement security,” said Graetz, who teaches tax and retirement policy at Columbia Law School. “The law deliberately set limits in order to restrict the revenue losses to the Treasury.”
Another tax expert, Edward Kleinbard of the University of Southern California, who reviewed the prices of some A- and L-shares, said Bain may have undervalued the A-shares, providing a benefit to insiders. Kleinbard, a Democrat and former chief of staff of the Congressional Joint Tax Committee, said the valuation of such shares should reflect real market prices.
But Jack Levin, a tax lawyer who has represented Bain, said the share prices at Bain were worked out “by all the investors at arm’s length based on the company’s prospects and economic condition at the time of the investment.” He said the increase in the value of Romney’s IRA reflected business smarts, not questionable investment practices. “There is nothing magical about it,” Levin said. In the years that Romney ran Bain, the company earned more than a 50% return on investment on average each year. Even a lower rate of return, 26% a year, combined with a regular investment of new funds in the account would give Romney “more than $100 million in his IRA account today,” according to Levin, a lawyer at Kirkland & Ellis. He noted that there was nothing improper about amassing so much wealth. “There is nothing in the tax law that prohibits an IRA from earning as much as the sponsor’s investment acumen allows him or her to earn,” he said.
Another way in which tax rules have favored Romney’s post-Bain financial situation is through the treatment of his severance package from Bain. Again, he benefited from a tax break in a way that is available to very few. His retirement earnings receive what is called the “carried interest” deduction. That’s an accounting classification that treats certain income from private-equity firms and other partnerships as capital gains and taxes it at a rate of 15%, rather than as ordinary income at 35%. ...
Tax experts say Romney can legally share in the carried-interest profits and take the deduction if Bain has agreed to the arrangement. Critics of the carried-interest deduction say this example highlights how the tax break can be abused. “Carried interest was intended to motivate managers going forward,” said Victor Fleischer, an expert in carried interest at the University of Colorado law school. “In cases like the Romneys, it just shows it is really all about fancy tax planning. It’s not motivating managers going forward. Not only is Mitt not providing any future services, Ann never did.” ...
Some tax experts worry that the arrangements Romney benefits from set a bad precedent for a president. “He looks for every tax angle to a degree that is unbecoming in someone who would be the executive in command of the administrative apparatus that enforces the tax law,” said Lee Sheppard, a tax lawyer and contributing editor for Tax Analysts, a publication for accounting and legal professionals.
Thursday, August 30, 2012
Wednesday, August 29, 2012
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
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.
Tuesday, August 28, 2012
Monday, August 27, 2012
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.
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.
(Hat Tip: Francine Lipman.)
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.
Sunday, August 26, 2012
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.
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.
Saturday, August 25, 2012
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.”
- Forbes, Romney's Taxes: It's The Carried Interest, Stupid, by Janet Novack
Friday, August 24, 2012
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 Gawker.com, 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.”
- Bloomberg, Romney’s Bain Funds Showcase Deals for Wealthy Only
- Business Insider, We Got Excited About Gawker's Huge Dump Of Romney Investment Info... But Here's The Truth About What's There
- Daily Beast, Inside Mitt Romney’s Bain Files
- Forbes, Gawker's Worthless 'Bain Files'
- Forbes, Romney's Taxes: It's The Carried Interest, Stupid
- NPR, Gawker Releases 950 Pages of What It Says Are Internal Bain Documents
- Dan Shaviro (NYU), The Bain Document Drop
- Washington Post, Bain Documents Reveal Tax and Offshore Details
Tuesday, August 21, 2012
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.
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.
Monday, August 20, 2012
Scott Galupo, the former Capitol Hill staffer turned blogger for the American Conservative, responds to my last post on Paul Ryan’s policy record, mixing some praise for Ryan with the following critique:
My problem with Ryan isn’t on the entitlement reform side; it’s on the revenue side. His assumption that another round of supply-side tax cuts will spark growth and unleash pent-up consumer demand strikes me as just as wooly-headed as the Tea Party freshmen’s knowledge of the federal budget.
And it’s this outmoded Kemp-ism that undermines his best idea, i.e., premium support. If Ryan and the GOP would have agreed to a sensible compromise on new revenue — which can be accomplished without the higher marginal tax rates that Obama calls for — then a deal on Medicare would have been far more likely.
I agree with Galupo’s first point; I’m more doubtful about the second one. Ryan’s supply-side zeal is probably his most significant weakness as a policy entrepreneur: Like most Reaganites, he has a Kemp-ian belief in the growth-unleashing power of lower marginal tax rates, but he’s operating in an era when (thanks to Kemp and Reagan) those rates are already low enough that there’s a lot less to be gained from slashing them even further. This doesn’t mean that some kind of rate-lowering, base-broadening tax reform isn’t still a good idea — it is, and Ryan’s right to champion it. But it isn’t the only good idea in the world, and the disappointing returns to the Bush-era tax cuts strongly suggest that the interests of the investor class are not always identical to the interests of middle-income Americans, and that the goal of lower rates needs to be balanced against other policy objectives.
Hence my persistent argument that the right needs to embrace a kind of small-government egalitarianism, which focuses on means-testing entitlements and ending corporate welfare and capping upper-income tax breaks (all ideas that Ryan supports) but then plows some of the savings into payroll tax cuts or a family-friendly tax reform or an expanded earned income tax credit, rather than just using them to keep (ahem) Mitt Romney’s taxes as low as possible. This has always been my biggest problem with the Ryan budget: In an age of stagnating incomes in the middle and reduced mobility at the bottom, its proposed reform of the welfare state doesn’t do enough to foster equality of opportunity.
Sunday, August 19, 2012
Following up on Friday's post, Romney Says He Paid 13% in Taxes for the Last 10 Years: A Taxing Blog: Romney Paid 13% in 2009? I Call BS, by Victor Fleischer (Colorado):
What’s interesting is that Romney’s claim could be literally true but misleading — which means that Romney is full of bullshit, but not a dirty liar. ... Romney’s claim may be literally true only because our method of tax accounting doesn’t calculate economic gains until those gains are realized through a sale or some other disposition. Romney may have paid tax at a rate higher than 13% on his 2009 return, but the dollar amount was likely to be embarrassingly small as a percentage of his economic income and wealth. That’s why he doesn’t want to release his tax returns. Normal people don’t think like tax lawyers — they would see a tiny amount of tax paid and recognize the injustice.
Even though Romney’s economic income was probably high in 2009 -- the Dow went up about 15% that year -- savvy investors know they can cherry-pick losses to offset realized gains. The capital loss carry-forward on Romney’s 2010 return suggests that he did just that.
According to Harry Frankfurt, bullshitters, unlike liars, do not deliberately make false claims about what is true. In fact, bullshit need not be untrue at all. Rather, bullshitters convey a favorable impression of themselves while remaining casually indifferent about whether what they say is true. They quietly change the rules governing their end of the conversation so that claims about truth and falsity are irrelevant.
Friday, August 17, 2012
Washington Post: Romney Says He Paid 13% in Taxes for the Last 10 Years. That Doesn’t Tell Us Much, by Ezra Klein:
“I did go back and look at my taxes, and over the last 10 years, I’ve never paid less than 13%,” Romney said today.
To which the obvious answer is: Well, then, why won’t you prove it?
I find it a bit difficult to believe that Romney has paid more than 13% every year. What we know about Romney’s taxes is that he paid 13.9% in 2010. But Romney’s taxes primarily accrue to income from investments. And the market — along with the global economy — collapsed in 2009. Romney should have had big losses to deduct.
I asked Ed Kleinbard, a professor of tax policy at USC, whether I was missing something. “It is extremely improbable that he paid 13% in 2009, just as it’s extremely improbable that he paid zero for 10 years straight,” he replied.
Kleinbard pointed out something I hadn’t thought of. “He didn’t specify 13% of what. That is, if you look at taxable income, well of course he paid 13% tax on his taxable income, but that’s an absurd base on which to measure an effective tax rate — it’s completely circular. The better base is adjusted gross income, because that gets closer to economic income.”
Daniel Shaviro, a professor of tax policy at NYU, made the same point. “The key question here is 13.9 % of what. We know he paid zero tax at the capital gains rate in 2009, since he had loss carryovers for 2010. So he may have had ridiculously low adjusted gross income (AGI), relative to his economic income for the year.”
Confused? Don’t be. “Adjusted gross income” (AGI) is pretty close to what you think about when you think about income. “Taxable income” is what you’re left with after accounting for deductions like the home mortgage interest deduction.
Here’s how this looks for a guy like Romney. In 2010, Romney’s adjusted gross income was $21,646,507. That’s the number we’re talking about when we say he paid a 13.9 percent tax rate. But, due to various credits and exemptions, his taxable income was $17,127,367. If he’d been using that figure as the denominator, his 2010 tax rate would have been closer to 18 percent.
So one thing he could be doing when he says he paid more than 13 percent every year for the past 10 years is referring to the rate he paid on his taxable income as opposed to his AGI. That would make it easy for him to say that he paid more than 13 percent, but he wouldn’t have paid more than 13 percent by the normal standards of accounting.
Is there any proof he’s doing this? Of course not. But there’s no proof he’s not doing it, either. That’s why people want Romney to actually release the returns: Then we can find out what’s really going on in them. Just having Romney tell us what’s in the returns doesn’t do us any good.
Wednesday, August 15, 2012
Following up on last week's post, Romney Tax Plan Would Increase GDP by 5.4%, Add 6.8 Million Jobs:
- Ezra Klein (Washington Post), Economists to Romney Campaign: That’s Not What Our Research Says
- Paul Krugman (Princeton University), Culture of Fraud
- Dan Shaviro (New York University), Hassett-Hubbard-Mankiw-Taylor Piece Issued by the Romney Campaign
- John Taylor (Stanford University), Paul Krugman is Wrong
Tuesday, August 14, 2012
Following up on my previous posts (links below): Wall Street Journal editorial: Mathematically Possible: Correcting the False Assumptions of Obama's Tax Gurus:
It isn't easy being the intellectual frontmen for President Obama's re-election campaign, as the boys at the Brookings-Urban Institute Tax Policy Center are discovering. Their ballyhooed study of Mitt Romney's tax plan looks worse with each new examination.
Mr. Romney's tax plan would cut income tax rates across the board by 20%, while cutting loopholes that mostly benefit those in the highest income classes. The Tax Policy Center claims it is "mathematically impossible" to finance the rate cut without jacking up taxes by $86 billion on the middle class and poor. Mr. Obama has jumped on the study to support his claims that Mr. Romney would raise taxes, though the Republican has proposed no such thing.
The study's biggest distortion is its raw assertion that Mr. Romney would refuse to close certain loopholes. In the appendix, the Tax Policy Center lists, among others, two giant tax deductions that it says would go untouched: the exclusion of interest on tax-exempt municipal bonds, and the exclusion of interest on life insurance savings. The study claims that Mr. Romney won't close these because they are incentives for saving and investment.
One problem: Nowhere do Mitt Romney or his advisers say that these deductions can't be touched. Senior economic adviser Glenn Hubbard says these deductions are definitely "on the table." ...
Scholars at the American Enterprise Institute examined what happens to the Tax Policy Center math when this error is corrected. AEI economic research associate Matt Jensen found that "Both of these exclusions largely benefit the wealthy, and, according to the Treasury Department, added together their repeal would net upwards of $90 billion that could be redistributed to lower-income individuals. That would go a long way towards balancing the supposed $86 billion windfall for the rich and tax hike on the middle class and poor, and it could make the impossible suddenly possible." [How the Tax Policy Center Could Improve its Romney Tax Study]
The AEI analysis warns that these numbers change from year to year, but it concludes that by eliminating these two deductions and a few other smaller ones, Mr. Romney can make his math add up. In other words, poof, no tax hike on the middle class.
This won't stop the Obama campaign from making its false claims, but it ought to at least embarrass the media into questioning them. It should also embarrass the analysts at the Tax Policy Center who claim to be nonpartisan, above-the-fray economists but somehow always seem to provide analysis that serves those who want to raise tax rates.
Prior TaxProf Blog coverage:
- WSJ: The Romney Hood Tax Fairy Tale (Aug. 9, 2012)
- The Romney Tax Plan, the Tax Policy Center, and the Wall Street Journal (Aug. 10, 2012)
Sunday, August 12, 2012
Don't Mess With Taxes, Ryan v. Romney on Taxes:
|Individual income tax rates||Reduce all current tax rates by 20%, creating six rates of 8%, 12%, 20%, 22.4%, 26.4% and 28%
||10% rate on income up to $50,000 for single filers and $100,000 for joint filers; 25% on taxable income above these amounts. Eliminate most tax deductions, credits and exclusions but increase the standard deduction and personal exemption amounts. Taxpayers also would have the option to use existing tax laws if that provided a better filing result.|
|Corporate taxes||25% U.S. tax rate and for multinational corporations a territorial system where taxes basically would be collected only by the countries in which the money was made||Replace corporate income tax with a border-adjustable business consumption tax of 8.5%|
|Investment taxes||No tax on any investment income for individuals with adjusted gross income of less than $200,000; 15% tax on interest, dividends and capital gains for individuals making $200,000 or more||No taxes on any investment earnings regardless of taxpayer's income
- The Atlantic: Mitt Romney Would Pay 0.82% in Taxes Under Paul Ryan's Plan, by Matthew O'Brien
- Center on Budget and Policy Priorities: Ryan Roundup: Everything You Need to Know About Chairman Ryan’s Budget
- Forbes: Romney, Ryan and Reagan: The Winning Team?, by Kelly Phillips Erb
- The New Republic, Why Ryan Makes Romney's Tax Problem Even Worse
- Politico: Mitt Romney, Paul Ryan Have Some Taxing Differences, by Steven Sloan
- Talking Points Memo: Under Paul Ryan’s Plan, Mitt Romney Would Pay Virtually No Taxes, by Benjy Sarlin
- Tax Policy Center: 2013 House Republican Budget Proposal (Excluding Unspecified Base Broadeners): Impact on Tax Revenue, 2012-22
- Tax Vox Blog, Paul Ryan’s Budget Plan: More Big Tax Cuts for the Rich, by Howard Gleckman
- Washington Post: Ryan Wants to Give the Wealthy Even Bigger Tax Cuts Than Romney Does, by Suzy Khimm
Saturday, August 11, 2012
Janna Little Ryan, wife of Republican Vice Presidential candidate Paul Ryan, is a former Washington, D.C. tax lawyer:
Born Janna Little, she is originally from Oklahoma where her mid-western values and his conservative politics were figurative bedfellows before they became physical bedfellows as husband and wife. She is a graduate of the prestigious (and expensive) Wellesley girls college. After obtaining her 4-year degree there she one-upped her sterling education by continuing on to attend one of the best law schools in the country, George Washington University. After graduating she became a high-powered tax attorney in the nation’s capitol of Washington DC. ...
She married Ryan in December, 2000 while he was just a babe in the woods during his very first term in Congress at the young age of 30 years old. They were married in her hometown of Oklahoma City. ... In short time Paul Ryan’s wife turned to a favorite activity of Republican wives everywhere: child bearing. The couple now have three children. The first born was a daughter named Elizabeth Anne Ryan. Two sons followed named Charles Wilson and Samuel Lowery Ryan.
(Hat Tip: Bob Kamman.)
New York Times: In Superrich, Clues to What Might Be in Romney’s Returns, by James B. Stewart:
On the face of it, Senator Harry Reid’s explosive but flimsily sourced claim that Mitt Romney paid no income tax seems preposterous. Mr. Romney has denied it, and without his returns no one can say for sure. But for someone who makes millions of dollars a year, would it even be possible?
Evidently it is.
It so happens that this summer the IRS released data from the 400 individual income tax returns reporting the highest AGI. This elite ultrarich group earned on average $202 million in 2009, the latest year available. And buried in the data is the startling disclosure that six of the 400 paid no federal income tax.
The IRS has never before disclosed that last fact.
Not even Mr. Romney, with reported 2010 income of $21.7 million, qualifies for membership in this select group of 400. But the data provides a window into the financial lives and tax rates of the superrich. ... And that data demonstrates that many of the ultrarich can and do reduce their tax liability to very low levels, even zero. Besides the six who paid no federal income tax, the IRS reported that 27 paid from zero to 10% of their AGI and another 89 paid between 10 and 15%, which is close to the 13.9% rate that Mr. Romney disclosed that he paid in 2010. (At the other end of the spectrum, 82 paid 30 to 35%. None paid more than 35%.) So more than a quarter of the people earning an average of over $200 million in 2009 paid less than 15% of their AGI in taxes.
How do they do it? ...Tax experts I consulted said these results almost certainly reflected aggressive use of tax-loss carry-forwards from 2008, since the stock market bottomed in March 2009 and rallied strongly during the rest of the year.
The superrich also accounted for a disproportionate amount of dividend income [and capital gains] ... taxed at a maximum rate of 15%, as opposed to the maximum rate on earned income of 35%, which helps explain why so many of the superrich pay a relatively low rate. Still, that preferential rate doesn’t get them anywhere near zero, or even 10%.
Edward Kleinbard, professor of law at the Gould School of Law at the University of Southern California, explained it this way, “You start with income dominated by tax-preferred income — capital gains and qualified dividends. That gets you to 15%. Then you use charitable contributions of appreciated securities to reduce ordinary income. But the charitable contribution deduction is capped at 50% of AGI. Now you’re way down, but you’re not at zero.”
What does it take to get to zero, or close to it? According to Professor Kleinbard, there are only two additional ways: tax loss carry-forwards to offset capital gains, and tax shelters, many of which have been deemed abusive by the IRS, to offset any remaining ordinary income after other deductions. ...
Since Mr. Romney seems to have had relatively little ordinary income since leaving Bain Capital, he may have been able to get to a very low rate in 2009 using tax loss carry-forwards from 2008 to offset capital gains and charitable contributions to offset up to 50% of his ordinary income. Without access to the returns, it’s impossible to know whether he would also have needed some additional form of tax shelter, aggressive or otherwise, to get even lower, or even to zero. ...
[E]ven Professor Kleinbard doubts that Mr. Romney paid no income tax. “It’s possible theoretically that Romney didn’t pay, but improbable,” he said. Far more likely is that he paid a very low rate that would generate renewed criticism. ...
There’s no reason to fault Mr. Romney for taking advantage of loopholes the tax code offers the superrich, however ill advised they may be as a matter of public policy. Mr. Romney didn’t make the law, and he’s called for broadening the tax base, which presumably means eliminating some of the breaks that benefited him. He could easily speak to that issue, since who would know better than he does which loopholes should be closed? ...
As long as Mr. Romney withholds his returns, continued speculation, and even outlandish conjecture, will probably flourish. “It’s reinforced my view that he’d be better off just releasing the returns rather than having people blindly speculating,” Leonard E. Burman, a tax specialist and professor of public affairs at the Maxwell School of Syracuse University, told me this week. “It seems like one of those slow-drip water torture things, and eventually he’s going to have to do it.” ...
What’s abundantly clear, both from Mr. Romney’s 2010 returns and from the returns of the top 400, is that at the very pinnacle of taxpayers, the United States has a regressive tax system. The top 400 earn more than 1% of all income in the United States, more than double their share in 1992. These 400 earned a total of $81 billion in 2009 — but paid an average tax rate of just 19.9%.
Friday, August 10, 2012
Following up on yesterday's post, WSJ: The Romney Hood Tax Fairy Tale:
- Tax Policy Center: Understanding TPC’s Analysis of Governor Romney’s Tax Plan, by David Marron:
The Tax Policy Center’s latest research report went viral last week, drawing attention in the presidential campaign and sparking a constructive discussion of the practical challenges of tax reform. Unfortunately, the response has also included some unwarranted inferences from one side and unwarranted vitriol from the other, distracting from the fundamental message of the study: tax reform is hard.
- Forbes: GOP Establishment's Shameless Attack on Nonpartisan Think Tank, by Len Burman (Syracuse University, Maxwell School):
The GOP establishment is in full attack mode after a Tax Policy Center report concluded that Mitt Romney couldn’t offset the effect of his proposed tax cuts by simply closing loopholes benefiting the rich. Either he would have to raise taxes on middle- and/or lower-income households, or his proposal will increase the deficit.
The Obama campaign ran with the first possibility and started saying that Mr. Romney was proposing a giant tax increase on the middle class. The Romney campaign attacked the study–perhaps not surprisingly (TPC was attacked from both sides for their analysis of the 2008 campaign proposals) and then its various surrogates started attacking the credibility of the TPC.
I’ll admit that I am certainly not unbiased on this issue as I was a co-founder of the TPC and served as its director until 2009, when I moved to Syracuse University. I’m enormously proud of TPC and think it has done a great deal to shed light on the tax policy debate, which had previously been incomprehensible to all but a few Washington insiders and academics. ... I should also point out that there has never ever been a political litmus test for employment at TPC, although there is a very high bar for competence. Several top TPC affiliates, including director Donald Marron, have held high level Republican appointments in the executive branch and CBO. Several have held positions in Democratic Administrations.
Wednesday, August 8, 2012
Wall Street Journal editorial: The Romney Hood Fairy Tale: The False, Invented Analysis Behind Obama's Tax Claims:
As he escalates his class war re-election campaign, President Obama has taken to calling Mitt Romney's economic plan "Robin Hood in reverse" or "Romney Hood." The charge is that even though Mr. Romney is proposing to cut tax rates for everybody across the board, Mr. Romney will finance this by imposing a tax increase on the middle class. His evidence is a single study by the Tax Policy Center, a liberal think tank that has long opposed cutting income tax rates.
The political left always says Daddy Warbucks gets all the tax-cut money. So this is hardly news, except that the media are treating this joint Brookings Institution and Urban Institute analysis as if it's nonpartisan gospel. In fact, it's a highly ideological tract based on false assumptions, incomplete data and dishonest analysis. In other words, it is custom made for the Obama campaign.
By the way, even the Tax Policy Center admits that "we do not score Governor Romney's plan directly as certain components of his plan are not specified in sufficient detail." But no matter, the study plows ahead to analyze features of the Romney plan that aren't even in it. ...
So on four separate occasions what TPC says is "mathematically impossible"—cutting tax rates and making the tax system more progressive—actually happened. Hats off to the scholars at TPC: Their study manages to claim that what happens in real life can't happen in theory.
The TPC analysis also fails to acknowledge how highly dependent the current tax system is on the very rich. As the Tax Foundation explains in a recent report based on CBO data: "The top 20 percent of households pay 94 percent of federal income taxes. The bottom 40 percent have a negative income tax rate, and the middle quintile pays close to zero." ...
What the Obama campaign and its acolytes at the Tax Policy Center are really saying is that tax reform that reduces rates and makes all income groups better off is impossible. This is a far cry from what Democrats used to believe, going back to Jack Kennedy in 1964 and in the 1980s when prominent Democrats Bill Bradley, Dick Gephardt and Don Rostenkowski helped to write the 1986 tax reform.
The Obama Democrats, by contrast, favor income redistribution and raising rates on the wealthy for their own partisan political sake, no matter the damage to growth, the cost in lost revenue, or a less progressive tax code as the rich exploit loopholes.
The great irony is that the candidate most likely to raise taxes on the middle class is Mr. Obama. He could raise every tax on the rich he proposes and still not come up with enough revenue to finance the increases in spending he wants in a second term. Where do you think he'll turn then?
A key troubling public manifestation of Romney's apparent insensitivity to tax obligations is his role in Marriott International's abusive tax shelter activity.
Romney has had a close, long-standing, personal and business connection with Marriott International and its founders. He served as a member of the Marriott board of directors for many years. From 1993 to 1998, Romney was the head of the audit committee of the Marriott board.
During that period, Marriott engaged in a series of complex and high-profile maneuvers, including "Son of Boss," a notoriously abusive prepackaged tax shelter that investment banks and accounting firms marketed to corporations such as Marriott. In this respect, Marriott was in the vanguard of a then-emerging corporate tax shelter bubble that substantially undermined the entire corporate tax system.
Son of Boss and its related shelters represented perhaps the largest tax avoidance scheme in history, costing the U.S. many billions in lost corporate tax revenues. In response, the government initiated legal challenges that resulted in complete disallowance of the losses claimed by Marriott and other corporations.
In addition, the Son of Boss transaction was listed by the Internal Revenue Service as an abusive transaction, requiring specific disclosure and subject to heavy penalties. Statutory penalties were also made more stringent to deter future tax shelter activity. Finally, the government brought successful criminal prosecutions against a number of individuals involved in Son of Boss and related transactions, including principals at major law and accounting firms.
In his key role as chairman of the Marriott board's audit committee, Romney approved the firm's reporting of fictional tax losses exceeding $70 million generated by its Son of Boss transaction. His endorsement of this stratagem provides insight into Romney's professional ethics and attitude toward tax compliance obligations. ...
What emerges from this window into corporate tax compliance behavior is the picture of an executive who was willing to go to the edge, if not beyond, to bend the rules to seek an unfair advantage, and then hide behind the advice of so-called experts to deflect criticism when a scheme backfires.
Mitt and Ann Romney were easily able to afford a $12-million La Jolla home. But that didn't insulate them from the winds buffeting the real estate market in the months following their purchase in 2008. After paying cash for the Mediterranean-style house with 61 feet of beach frontage, they asked San Diego County for dramatic property tax relief....
Initially, the Romneys asked that their 2009 assessment, $12.24 million, be reduced to $6.8 million, maintaining that their home had lost about 45% of its value in the first seven months they owned it.
Thirteen months later, after hiring an attorney to guide them, the Romneys filed an amended appeal, contending the home had suffered a less-dramatic fall of 27.3%, to $8.9 million.
They also filed an appeal for the 2010 tax year, claiming the house had dropped further, to $7.5 million, 38.7% less than the home's assessed value.
As a result, the Romneys have saved about $109,000 in property taxes over four years.
Tuesday, August 7, 2012
There is widespread recognition that the U.S. income tax is a complex, highly inefficient, and costly way of raising revenues to finance government expenditures. In this paper, I analyze a rough sketch of the Romney Tax Plan -- a rate-reducing, base-broadening tax reform. The simulations show that such a base-broadening, rate-reducing reform would have significant positive economic effects on the U.S. economy, including increases in investment, the capital stock, employment, and real wages. These gains are in addition to increases in GDP, investment, consumption, and employment that will occur as the U.S. economy continues to recover from the recent recession and as the population grows. Specifically, I find that the reform would, if passed immediately, increase GDP relative to baseline by 5.4 percentage points over the next decade, while creating 6.8 million jobs.
- R. Glenn Hubbard (Columbia University), N. Gregory Mankiw (Harvard University), John B. Taylor (Stanford University) & Kevin A. Hassett (AEI), The Romney Program for Economic Recovery, Growth, and Jobs
- Huffington Post, Mitt Romney Economic Advisers Draft White Paper To Back Up Job Creation Predictions
- Washington Post, Romney Has a New Economic White Paper. Here’s What He Left Out
After the IRS signaled its intent to consider proposed changes to the tax treatment of non-profit 501(c)(4) organizations, 10 Senators today asked IRS Commissioner Shulman to clarify the agency’s intentions for the 52-year-old regulation. In a letter led by U.S. Senator Orrin Hatch (R-Utah), Ranking Member of the Senate Finance Committee, the lawmakers questioned the IRS’s response to a public rulemaking petition from outside groups pressuring the agency to take action on 501(c)(4)s and said it was essential that politics not play any role in its decision-making process.
“We believe these petitions have less to do with concerns about the sanctity of the tax code and more about setting the tone for the upcoming presidential election, and we urge you to resist allowing the IRS rulemaking process to be subverted to achieve partisan political gains,” wrote the Senators.
On July 17th in a letter to petitioners, the IRS said it “was aware of the public interest” in 501(c)(4)s and that it “will consider proposed changes,” raising questions on whether the agency has already started a an internal process to amend its regulations.
The Senators continued, “Your acknowledgement of the political character of the public interest in 501(c)(4) organizations would caution against sudden changes to well-established law. Yet, your letter seems to suggest that outside political pressure is actually what is triggering your agency’s considering of changes to the law.”
Joining Hatch on the letter are Senators Chuck Grassley (R-Iowa), Jon Kyl (R-Ariz.), Pat Roberts (R-Kan.), Mike Enzi (R-Wyo.), John Cornyn (Texas), John Thune (R-S.D.), Mitch McConnell (R-Ky.), Lamar Alexander (R-Tenn.), and Kay Bailey Hutchison (R-Texas).
- Chicago Tribune, IRS in Political Crossfire Over Tax-Exempt Pressure Groups
- The Hill, Senators Warn IRS to Ignore Political Pressure to Rewrite Super-PAC Rules
Sunday, August 5, 2012
The Onion: Speculation About Romney's Taxes:
As Democrats continue to press Mitt Romney to release more of his tax records, the Republican candidate has become more assertive in his rejection of such calls, leading many to speculate about what the filings contain. Here are some of the details experts suggest he may not want the public to see:
- List of residences includes Caribbean property named “Skull Island
- Used Obama’s $6,500 homebuyer credit for six different houses in 2010
- From 2002 to 2006, official occupation was listed as “masseuse”
- Wrote off $10,000 in aftershave during 2004
- Really shitty handwriting for someone who expects to be elected president
- Years of filings in state of Delaware prove definitively that the candidate himself is a corporation
- In 2009, thanks to clever accounting, the IRS actually paid Romney $25 million in taxes
- Just doesn’t want people to see so many pages of official documents that list his first name as Willard
Tuesday, July 31, 2012
Pressure is mounting for Mitt Romney to release more of his financial records. Mr. Romney has made public only his 2010 tax returns and has said his 2011 documents will be released soon. “That’s all that’s necessary for people to understand something about my finances,” he said recently. He is “simply not enthusiastic,” he also said, about giving the Obama campaign “hundreds or thousands of more pages to pick through, distort and lie about.” ...
No one should begrudge Mr. Romney or his family the wealth they have earned. But if he has not paid the taxes that apply to transfers of such wealth, this should concern us all. After all, who do you think pays for the shortfall?
(Hat Tip: Dorothy Brown)
- Forbes: Romney Has a Duty to Exploit Every Tax Loophole? Horse Feathers!, by Janet Novack:
If none of Mitt Romney’s accounts were in offshore tax havens, would the presumptive Republican nominee be less competent to handle foreign affairs? If he didn’t have an IRA that could be worth as much as $102 million (perhaps, according to the Wall Street Journal, because of the unusual and aggressive way Bain Capital structured its employees’ personal investments in its deals) would he be less able to deal with retirement policy, Social Security and Medicare?If Romney had decided that his wife’s money losing partial ownership of Rafalka, a horse competing in the London Olympics, was really just part of a wonderful, healthful hobby, and one they could well afford to fund without trying to cut their tax bill, would that make him less qualified to be President? ...
[H]e is either ignorant of the practical functioning (and malfunctioning) of our tax system; hopes the American public is ignorant of it; or has bought into an aggressive approach to tax-compliance that contributes to the tax mess. ...
My take on this after decades of writing about tax planning, legitimate tax shelters, over-the-line tax shelters and out and out tax cheating, is this: The attitude in some sophisticated circles that folks are chumps (or even negligent) if they don’t structure their affairs to exploit every possible provision of the tax code in ways Congress intended (and didn’t) creates a climate that allows abusive tax shelters to flourish and undermines the functioning of the tax code (which, granted, is plenty dysfunctional on its own.)
- Dan Shaviro (NYU), Others Weigh in on Romney's Tax Returns
Saturday, July 28, 2012
Following up on my previous posts (links below): Bloomberg, Romneys Have Tax Deduction With Olympic Hopes on Rafalca:
Rafalca, a 15-year-old mare competing in dressage at the Olympics opening today in London, will be trying to add to the U.S. medal count and Republican presidential candidate Mitt Romney’s bottom line. Romney’s wife, Ann, who calls horses her “passion in life,” has an investment in them, including Rafalca, valued at as much as $500,000.
The couple’s tax returns classify Ann Romney’s pastime as a business that lost $77,731 in 2010, rather than a hobby, and as a passive investment instead of one they actively manage. Each of those decisions has tax consequences.
- Tobin: The Tax Treatment of Ann Romney's Dressage Horse Activity (June 25, 2012)
- Forbes: Both Left and Right Got the Taxes on the Romneys' Olympic Horse Wrong (July 20, 2012)
Thursday, July 26, 2012
American Thinker: Did Barack Obama Underreport His Income to IRS?:
President Barack Obama released his recent personal finance records in 2008, which included his 2004 U.S. Individual Income Tax Return and Senate Annual Finance Report. President Obama's records for 2004 do not reconcile with the State of Illinois Comptroller's Office. There are inconsistencies in the total compensation received as an Illinois State Senator. The largest error likely is President Obama's omission of a "Leadership Stipend" of over $8,000. This stipend should have been recorded as income.
Tuesday, July 24, 2012
- Linda Beale (Wayne State), What's Romney Got to Hide? (Part I)
- Linda Beale (Wayne State), What's Romney Got to Hide? (Part II)
- Linda Beale (Wayne State), What's Romney Got to Hide? (Part III)
- Len Burman (Syracuse), Gov. Romney: Just Release the Tax Returns
- Dan Shaviro (NYU), 2010 Romney Tax Return Story
- Bloomberg, Romney Should Release Taxes, Majority Surveyed by Gallup Say
- FactCheck.org, Romney and the Tax Return Precedent
- Financial Times, Speculation Mounts Over Romney’s Tax Records
- The Hill, Trump: 'Clamor for Mitt Romney's Tax Returns Has Died Down'
- Huffington Post, Mitt Romney Avoided Major Tax Hit By Shifting Stock Of Offshoring Firm
- New York Times, When Will Romney Reveal His Returns?
- NPR, Romney's 1040: Tax Terms An Accountant Would Love
- Reuters, What Might be Hiding in Romney's Tax Returns?
- USA Today, Two Years of Tax Returns Is Plenty
- Washington Post, If Romney Releases His Tax Returns, What Are the Worst Things We Could Find?
- Washington Post, The Secret in Mitt Romney's Tax Returns
Wednesday, July 18, 2012
Romney's 2010 tax return, when combined with his FEC disclosure, reveals red flags that raise serious tax compliance questions with respect to his possible tax minimization strategies in earlier years. The release in October of his 2011 return will at best act as a distraction from these questions.
So, what are the issues?
The first is Romney's Swiss bank account. Most presidential candidates don't think it appropriate to bet that the U.S. dollar will lose value by speculating in Swiss Francs. ... The Swiss bank account raises tax compliance questions, too. ... The IRS announced in 2009 a partial tax amnesty for unreported foreign bank accounts, in light of the Justice Department's criminal investigations involving several Swiss banks. To date, some 34,500 Americans have taken advantage of such amnesty programs. Did the Romneys avail themselves of any of these amnesty programs? ...
Second, Romney's $100 million IRA is remarkable in its size. Even under the most generous assumptions, Romney would have been restricted to annual contributions of $30,000 while he worked at Bain. How does this grow to $100 million? One possibility is that ... Romney stuffed far more into his retirement plans each year than the maximum allowed by law by claiming that the stock of the Bain company deals that the retirement plan acquired had only a nominal value. ...
Third, the vast amounts in Romney's family trusts raise a parallel question: Did Romney report and pay gift tax on the funding of these trusts or did he claim similarly unreasonable valuations, which likewise would have exposed him to serious penalties if all the facts were known?
Fourth, the complexity of Romney's one publicly released tax return, with all its foreign accounts, trusts, corporations and partnerships, leaves even experts (including us) scratching their heads. Disclosure of multiple years' tax returns is part of the answer here, but in this case it isn't sufficient. Romney's financial affairs are so arcane, so opaque and so tied up in his continuing income from Bain Capital that more is needed, including an explanation of the $100 million IRA.
Finally, there's the puzzle of the Romneys' extraordinarily low effective tax rate. For 2010, the Romneys enjoyed a federal tax rate of only 13.9% on their adjusted gross income of roughly $22 million, which gave them a lower federal tax burden (including payroll, income and excise taxes) than the average American wage-earning family in the $40,000 to $50,000 range. The principal reason for this munificently low tax rate is that much of Romney's income, even today, comes from "carried interest," which is just the jargon used by the private equity industry for compensation received for managing other people's money. ...
For a nominee to America's highest office, a clear and transparent reporting of his finances should be nothing more than routine.
- ataxingmatter: What's Romney Got to Hide? It's Past Time for Financial and Tax Transparency, by Linda Beale (Wayne State)
- Bloomberg: What's Romney Hiding in His Tax Returns?, by Joshua Green
- Daily Beast: The Emerging Theory on Mitt's Taxes: It's 2009, by Michael Tomasky
- National Review Editorial: Release the Returns
- New York Magazine: McCain Can ‘Personally Vouch’ That There’s Nothing Wrong With Romney’s Tax Returns
- Start Making Sense: More on the Mystery of the Swiss Bank Account, by Dan Shaviro (NYU)
- Wall Street Journal: National Review to Romney: Release More Tax Returns
- Washington Post: Experts: Mitt Romney’s Returns Could Show He Paid Very Low Tax Rates, by Greg Sargent
- Washington Post: Romney’s Right Not to Give Up the Tax Returns, by Jennifer Rubin
(Hat Tip: Josh Blank, David Miller.)
Tuesday, July 17, 2012
Dan Shaviro (NYU), Why Won't Romney Release His 2009 Tax Return?:
Increasingly, everyone (including Republicans such as George Will, Matthew Dowd, and William Kristol) agrees that the reason for Romney's reluctance to release any pre-2010 tax return might be that what it would show is worse than all the heat he is taking for non-disclosure.
But what could that be? Well, I certainly don't know either, but here are some salient points:
1) We know from the 2010 tax return, in which he had a net capital loss carryforward from 2009, that he zeroed out his net capital gains - including from carried interest Bain income - in 2009.
2) 2009 was the last year in which he received certain Bain payments as the playout of his "retroactive retirement."
3) It's been hard to understand what benefit he thought he was getting from the Swiss bank account, and there was an IRS amnesty program in 2009 for fraudulent nondisclosure of offshore income. If he had to come clean in 2009, this might be embarrassing, especially given that there was an iron fist inside the IRS leniency offer (i.e., if you held out, they might get you without any amnesty).
From the first two items above, it may be a reasonable guess that Romney had a lot more gross income in 2009 than 2010 and 2011, yet paid less tax or even zero tax.
- The New Yorker, Why Won’t Romney Release More Tax Returns?
- Wall Street Journal, Romney Rejects Calls on Tax Returns
- Washington Post, New Obama Attack: Maybe Romney Didn't Pay Taxes
Monday, July 16, 2012
FactCheck.org: Biggest Tax Increase in History?:
Will “Obamacare” be the largest tax hike in US history?
Several readers have asked us about this since Rush Limbaugh made a hugely exaggerated claim that the new health care law is “the biggest tax increase in the history of the world.” ...
is this increase the largest in American history? Perhaps -- as measured by the rather useless yardstick of raw dollars, with no adjustment for inflation. We rely here on recently updated tables from U.S. Treasury Department tax analyst Jerry Tempalski, whose 2006 paper on “Revenue Effects of Major Tax Bills” is the standard reference for making such comparisons. ...
By this measure, the Affordable Care Act’s $76.8 billion in revenue increases tops the $65.9 billion for the highest single year for Bill Clinton’s 1993 deficit reduction bill, which Republicans have for years attacked as the biggest in history. But as we’ve said before, that attack is misleading, and the raw-dollar measure is a poor way to measure the size of a tax increase.
For one thing, that measure doesn’t take account of inflation. Using “constant” dollars -- all adjusted to equal the value of a dollar in 2009 -- the ACA drops to fourth place, and the tax increase signed in 1982 by President Reagan becomes the largest since 1968.
But even this measure takes no account of a population that is steadily rising. Today’s population is 82 million higher than it was at the time of Reagan’s 1982 increase, and 56 million higher than it was when Clinton signed the 1993 increase. So the average tax increases in those years was accordingly higher on a per-person basis than the ACA.
Incomes are also up since those times -- even adjusting for inflation, and despite declines since the economic crisis of 2008. So the effect on the average person’s paycheck would be reduced even further, compared to earlier increases.
So what is the best yardstick for measuring changes in taxation? “The single best measure for most purposes is probably the revenue effect as a percentage of GDP, because it eliminates the effects of inflation, real economic growth, and the size of total federal receipts,” Tempalski wrote in 2006. We concur, as do most tax experts we know of.
And by that measure, the revenue increases in the ACA are smaller than most of the increases enacted since 1968 -- and less than one-quarter the size of the largest.