The Romneys’ tax returns for 2010 and 2011

Cal Thomas, in today’s (8/10/12) Daily Local News, writes under the title “Most Americans are not fooled by ‘Dirty Harry’s’ shell game,” referring to senate majority leader Harry Reid’s charge that Mitt Romney paid no income taxes during ten years for which he has declined to release his tax returns. Thomas goes on to attack Obama and Biden without deigning to talk about about the question at hand, Romney’s tax returns.

Reid said that the zero taxes charge came to him from a Bain insider, although Kos, “Gaming out Harry Reid’s gambit,” The Daily Kos, 8/10/12, speculates (citing no evidence) that the secret informant is billionaire John Huntsman, Sr. (incidentally, the largest donor to the “newest, biggest building” at UPenn’s Wharton School of Business) or else his son, Romney’s former primary opponent John Huntsman, Jr.

Taking the “political game” approach, Kos goes on to say of Reid:

So he goes public and crosses his fingers that the Republicans will take the bait—if they ignore him, his gambit goes nowhere. No need to worry. They instantly ramp up the outrage meter from 0 to 11.

Cal Thomas is of that school: Romney “…should ignore Reid and focus on what most Americans care most about: rebuilding our shattered economy.”

I doubt Romney can afford to take that advice. Remember the Swift Boat affair? What candidate these days is going to sit back and ignore serious charges? “I’m not going to dignify that with a reply” doesn’t play well any more, especially when volume is amplified 24/7 by the Internet.

Furthermore, voters aren’t so absent-minded that they can’t see a connection between taxes and the economy.

As poet Calvin Trillin wrote in “Mitt Romney’s Tax Returns,” in The Nation, August 13/20, p. 6:

Why go through this sort of ordeal?
What doesn’t Mitt want to reveal?

And that will remain the question until it is answered, either voluntarily by Romney, or else (I am guessing) by an insider leaking information, either to make a political statement or for personal gain (think of the street value of Romney’s 2009 tax return, if it really does show a bottom line of zero).

What do we actually know? Romney released in January an estimated return (joint with his wife Ann) for 2011. I haven’t figured out whether he has yet filed a final return for that year, or has filed it and not released it.

And he released the final (also joint) 2010 return, 203 pages long (that does sort of suggest some tax simplification is in order, doesn’t it?)

You can download both returns at The Washington Post. For those of us who prepare our own tax returns, it is sort of interesting reading–especially line 22 showing $20,909,880 total income in 2011. For the average person working about 40 X 50 = 2,000 hours a year, that would come to about $10,000 an hour. But of course, Romney doesn’t work by the hour; his and his wife’s professions (according to schedule C, p. 5 of the pdf) is “Independent artists, writers, performers.”

That measly (estimated) $20,909,880 is down from $21,661,344 in 2010. But in the scale of things, what’s a mere $750,000 cut in income from one year to the next?

We’ve just started, and actually, we can already see a good reason Romney doesn’t want to release any more returns: there is so much fodder there (and I don’t mean for Rafalca, the dressage horse thanks to which, if she turns a profit in later years, the Romneys have carried over a nearly $78,000 passive loss on their 2010 returns).

Joshua Holland, “10 Theories About What Mitt Romney’s Really Hiding in Those Tax Returns,” Alternet, 8/1/12, sums up interesting speculation about why it’s currently worth more to Romney to maintain an embarrassing secrecy than to reveal the hidden truths.

For more on the Romney-Reid squabble, see Sam Stein, “Mitt Romney To Harry Reid On Tax Dodge:’Put Up Or Shut Up'” in Huffington Post, 8/2/12. Far from “putting up or shutting up,” Reid shot back:

There is a controversy because the Republican presidential nominee, Governor Mitt Romney, refuses to release his tax returns. As I said before, I was told by an extremely credible source that Romney has not paid taxes for ten years. People who make as much money as Mitt Romney have many tricks at their disposal to avoid paying taxes. We already know that Romney has exploited many of these loopholes, stashing his money in secret, overseas accounts in places like Switzerland and the Cayman Islands.

Last weekend, Governor Romney promised that he would check his tax returns and let the American people know whether he ever paid a rate lower than 13.9 percent. One day later, his campaign raced to say he had no intention of putting out any further information….

I understand Romney is concerned that many people, Democrats and Republicans, have been calling on him to release his tax returns. He has so far refused. There is only one thing he can do to clear this up, and that’s release his tax returns.

Reid speaks like such a nice quiet guy, but his former prize-fighter instincts are still there at age 72.

According to Richard Rubin and Jesse Drucker, “Romney’s 13.9% Tax Rate Shows Power of Investment Tax Preference,” Bloomberg.com, 1/25/12, in 2010 (the year of the 13.9% tax rate),

The returns also demonstrate how, using sophisticated estate planning, Romney has been able to give millions of dollars to his children free of estate and gift taxes, because of a legal structure known as a “grantor trust.”

Romney established three trusts to which he contributed assets. The campaign said his children were listed as beneficiaries, though didn’t specify of which trusts. The income generated by the trusts triggers a tax obligation for Romney. By picking up that tax bill, he found a legal way to transfer money to his children free of gift taxes….

So it seems Romney is paying tax on investments that actually benefit his children, so that he does not need to declare the income on those investments as his own income. In other words, he set up trust funds, as enabled by tax law written for people who want to set up trust funds. I haven’t been able to hunt down the details yet, but if those returns include the tax he pays on his sons’ trust without including the corresponding income, that is driving his 13.9% higher than it would be on his and his wife’s own income.

In addition, according to Bloomberg.com,

The 2010 return shows that the Romneys’ blind trusts have invested in an array of funds in tax-favored jurisdictions, including the Caymans, Ireland and Luxembourg. Such offshore funds attract investments from overseas investors who don’t want to file disclosures with the IRS, said Bradley Smallberg, a CPA at Smallberg Sorkin & Co. LLP in Melville, New York.

Since the IRS doesn’t receive information about those “outsourced” investments, they don’t go into the 13.9% figure, but one can bet that if they did, Romney’s overall tax rate would again go lower, because he probably pays virtually no tax in those “tax-favored jurisdictions.”

So even the low 13.9% seems an illusion. To be precise, the 13.9% is total tax obligation divided by Adjusted Gross Income (line 37). After itemized deductions and exemptions are taken into account, taxable income (line 43) is only $17,120,067, of which the total tax of $3,009,766 is 17.6%–just in case you are comparing to your own tax rate.

The returns also show some of the many ways in which the wealthy reduce their tax obligations. For example, they show negative income of 279,884 + 272,638 = 552,522 in 2010 and 352,805 in 2011. Often, such negatives are paper losses involving the financial dealings of corporations and partnerships and how they pass losses along to individuals in strategic fashion.

In addition, tax-deductible contributions include the accrued value of investments. In 2011, the Romneys donated a total of 232,862 + 468,840 + 218,870 = 920,572 in shares of 3 companies (p. 63, form 8283). The return does not indicate the cost basis, which needs to be subtracted from the value donated to derive the tax deduction. When and if that becomes public, you can bet the cost basis will be relatively small.

In fact, Romney’s tax-preparer claimed the entire $920,572 as a tax deduction on schedule A (p. 3; remember, this is the “estimated” return), but that will presumably have to be lowered after the tax basis is known (or, since the shares are labeled “partnership distribution,” maybe the basis claimed is $0; if so, one more way the executives cash in…).

The way non-cash contributions work is, you try to donate your assets that have gained the most in value. On the scale of more normal incomes, suppose you donate shares worth $1,000 and, a few years ago, you paid $100 for them. You have a $900 tax deduction. The $900 wasn’t income to you, and you never paid taxes on it, it’s all on paper, but it still serves to reduce your taxes by a lot more than the $100 you paid back then. Perfectly legal, of course, because that’s how the tax code is written.

Then there is the 15% (legal, of course) rate for hedge fund operators’ “carried interest,” which to the rest of us would look like ordinary income. For an explanation, see “Barack Obama says Mitt Romney received carried interest, a tax ‘trick'” at PolitiFact.com, 7/17/12. Whether or not carried interest is a “trick,” it is very lucrative for those who can benefit from it:

Ben Ginsberg, an attorney for the Romney campaign, said … that “the amount from carried interest” earned by Romney “was $7.4 million in 2010 and $5.5 million in 2011.” By having that income taxed at 15 percent rather than 35 percent meant that Romney may have saved more than over $2.5 million in taxes.

Of course, the Romney returns do not include information on the various trusts he has set up, which for tax purposes are separate entities, such as the Ann D. Romney Blind Trust, organized under the laws of the Cayman Islands through a company in San Francisco (2010 return, p. 89, form 8865). You can bet that if any taxes at all were paid on foreign-based trusts like that, they were under the cited 13.9% figure.

Even more than 13.9% would be historically very low for someone so wealthy. According to “Income tax in the United States,” Wikipedia,

Top individual tax rates were lowered in 2004 to 35% and tax rates on dividends and capital gains lowered to 15%, with the Bush administration claiming lower rates would spur economic growth.

Wikipedia’s chart of “Top marginal income tax rates from 1913 to 2011” shows the highest tax brackets, basically dropping since the highest 94% rate at the end of World War II. Why doesn’t Romney’s (arguable) 13.9% rate in 2010 come anywhere near 35%? There are many reasons, in part the much lower capital gains rate and the “carried interest” advantage, but also because of the numerous deductions, loopholes, and foreign obfuscations that the tax code shamefully permits.

So why are taxes such a big issue right now?

1) The US tax system is totally crazy.

2) The craziness tends to benefit the wealthiest people.

3) Romney is a prime case in point, now that he is under pressure to release more tax info.

4) Corporate taxes are crazy too. (For Romney’s role involving corporate tax avoidance schemes, see Jed Lewison, “Obama ad hits Romney over ‘Son of Boss’ tax avoidance scheme,” Daily Kos, 8/9/12.)

This all brings up one of the interesting features of American politics. For all of the corruption, insider deals, misleading ads, and public apathy, somehow the periodical contests for office do have a way of raising issues that are important to citizens.

And taxes, for sure, are one of those issues.

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About politicswestchesterview

Nathaniel regards himself as a progressive Democrat who sees a serious need to involve more Americans in the political process if we are to rise to Ben Franklin's challenge "A republic, madam, if you can keep it," after a passerby asked him what form of government the founders had chosen. This blog gives my views and background information on the local, state, and national political scenes. My career in higher education was mainly in the areas of international studies, foreign languages, and student advising, most recently at Franklin & Marshall College in Lancaster, from which I retired in 2006. I have lived in West Chester since 1986.
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