Earlier today, while the most heavily anticipated tax return in U.S. history was being released, I was making my way back to Aspen, joyfully oblivious to the media feeding frenzy that was unfolding 30,000 feet beneath my feet.
For obvious reasons, every news agency in America had been eagerly awaiting the release of Republican Presidential candidate Mitt Romney’s 2011 tax returns. This election has been rife with undertones of class warfare, with the Democratic party portraying Romney vast wealth as leaving him out of touch with the common man, and the 13.9% tax rate he paid on $20 million of income in 2010 as the symbol of all that’s wrong with our current system.
I previously summarized my thoughts on the impact Romney’s tax returns should have on the election with a resounding “meh.” Romney’s rich. We know that. He benefits from one of the countless loopholes (and yes, the carried interest preference is a loophole) scattered throughout the current Internal Revenue Code to tax the overwhelming majority of his income at 15% rates. We know that too, and it’s of no fault of Romney’s; he didn’t write the law, he simply followed it. As a result, a lot of the ire the American public lobs his way is woefully misdirected.
The facts surrounding his 2011 tax return are as follows:
• His effective tax rate was 14.1%, with Romney paying $2,000,000 in taxes on $13.6M of adjusted gross income.
• Romney’s 2011 AGI was nearly $9,000,000 less than his 2010 AGI, and nearly $7,000,000 less than the projected 2011 AGI he released in January. No explanation was given for the discrepancy, but based on what I see on Romney’s Schedule D, I’m guessing he harvested some capital losses at the last minute.
• The Romneys’ donated $4,020,772 to charity in 2011, amounting to nearly 30% of their income.
• In the most bizarre aspect of the release, the Romney’s claimed a deduction for only $2.25 million of those charitable contributions. Why? As Romney’s investment advisor Brad Malt explained:
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.
So to clarify, Romney willingly and willfully neglected to deduct $1.7M of charitable contributions he was perfectly entitled to deduct, all so that his effective tax rate would stay above a completely arbitrary and capricious baseline he informally mentioned as part of his campaign rhetoric. As if somehow, a 12.8% effective rate would make him the enemy of the state, while a 14.1% rate makes him a man of the people. A nice gesture to be sure, but one that seems wholly unnecessary and to be honest, a bit silly.
Other than that, the 2011 tax return doesn’t show a whole lot. I’d like to look a bit closer at Romney’s Massachusetts return, as his Schedule A deduction for state income taxes is over twice as large as it was in 2010 and is forcing him into $600K of AMT, but that review won’t come until later this weekend.
Because these 2011 results offer no surprises, they should have no impact on the public’s perception of Mitt Romney, presidential candidate. In other words, if you thought he was a symbol of greed and excess before today, you still will tomorrow. And the fact that Romney’s tax return is in excess of 300 pages and chock-full of foreign investment disclosures will only strengthen your resolve. And if you thought he was the right guy for the job before today; that should remain true as well.
Of course, as much as people were clamoring for Romney’s 2011 tax return, it is the still undisclosed returns from 2000 through 2010 — when Romney was really raking in the cash at Bain Capital — that his critics long to get their hands on. The returns have been the center of intense speculation, with Democratic leader Harry Reid citing “anonymous sources” as assuring Reid that Romney paid NO income tax during more than a few years during the past decade.
Today, Romney finally took a small step towards clearing his name, releasing a notarized letter signed by PwC that contained certain facts about his previous 20 tax returns:
• 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.
Again, this bullet point release will do little to placate those who are convinced that Romney’s unreleased returns are hiding something nefarious, just as four full years into the Obama presidency, there are still those who clamor for a different version of his birth certificate. But a few thoughts on the bullets:
1. At first glance, one might think that because Romney’s average effective federal rate over the 20-year period was in excess of 20%, perhaps he has previously been taxed on more ordinary income than we see on his most recent tax returns. But keep in mind, the tax rate on long-term capital gains hasn’t always been its current 15%. The rate was 28% until 1997, and then 20% until 2003. Since Romney was likely earning significantly more income during the late 90′s/early 2000′s financial boom than he is today, and because that income was subject to the higher preferential rates in place at that time, it would explain the average effective rate of 20% without necessitating Romney to have ever paid ordinary income tax rates on a significant portion of his earnings.
2. While Romney is certainly a charitable guy and should be commended for his philanthropy, his giving each year has been limited to two types: cash tithing to the Church of Latter-Day Saints, and contributions of stock to Romney’s own Tyler Foundation. This makes it difficult to trace exactly what segments of the population benefit from Romney’s generosity.
Obviously, the release of Romney’s 2011 tax return — and more importantly, the release of data relating to his previous 20 tax returns — will elicit a response from the Obama camp. But from my perspective, the uproar about Romney’s effective tax rate remains much ado about nothing.