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.
Release the tax returns that we *really* want to see, 2005-2009, Mr. Romney.
If you are looking for a way to reboot your campaign, this would be it.
Show everyone that, indeed, there is nothing to hide.
Now THAT would really change the momentum of the campaign to your advantage.
This is the single issue for which you have never once flip-flopped. Why? It makes voters wonder.
Mr. Romney, you are running for President of the United States.
This is a position of Trust.
Ronald Reagan said, “Trust but Verify.”
Mr. Romney has said, “Trust me,” re his tax returns.
It is not unreasonable for voters to want to “Verify.
The longer you delay, Mr. Romney, the more suspicious it appears.
Obama released 8 years of tax returns
GW Bush 10 years
Clinton 12 years
GHW Bush 14 years
George Romney 12 years.
What is the problem, Mr. Romney? Release your tax returns.
Dean, what’s odd is that it was Romney’s father who really started the practice of releasing multiple years worth of tax returns while running for public office.
The key issue are two fold one is Romney a cheat. That answer is a resounding no! His return in unremarkable…he paid what he owed and really did not do much in the way of tax shelters.mdid he plan, sure. Did he take advantage of the rules, yes but no real major restructuring of companies, etc… Look the guy made a lot of money and his income for the most part since he left Bain capital was passive.
So the second issue is capital gains and dividend preference rates. In 2001 I had hoped that the double taxation relief should have come on the corporate not individual side. Allow a deduction (or partial deduction) on the corporate income side. Of course if that happend romney would escape scrutiny…because he paid 40%, he would have gotten a bigger take, and the tax coffers would be reduced. If you have 100 of dividends, that wealth creation is essentially taxed at over 50 percent….how much more does the fed expect to take…ok don’t answer that.
Part 2b are capital gains. This one is more tricky, but if one understands what a capital gain is they understand that this is also double taxation, however on a forward looking basis. The best example is take warren Buffett. He takes a tiny salary, but even today owns almost 40′percent of Berkshire Hathaway. He says he pays too little in tax…this of course is a crock. A man like Buffett would likely earn about 50 million a year in all in compensation….if he took it Berkshire Hathaway would pay approximately 20 million less income tax (fed and state). But here is the key point, Buffett is Berkshire Hathaway, and even in his late years owns most of it. So instead of taking salary he lets it ride…but wait…because he isn’t taking a salary Berkshire Hathaway PAYS MORE CORPORATE TAX! In other words its already being taxed just not to him. If Buffett took a salary the tax would be paid by him and deducted by his company which he currently owns in the neighborhood of 40′percent. Lets say we go back in time when he owned more…what’s the difference? This is they key.
The other element of this is that our system wants rich people to invest. Remember the dot com boom. Most of those companies failed….BUT millions were employed as they failed. But that ride created millions of jobs. The rich made and lost billions. And yes so did the pensions….when capital is deployed it creates jobs. The ideas that succeed create great wealth, if the government is now going to take a bigger stake, specifically among the super rich that is a disincentive…the last thing our economy needs.
Larry, I agree with you that the discussion of Romney’s effective tax rate fails to take into account the double taxation imposed on many of his investments. Just another reason I find so much emphasis on one number on one man’s tax return to be capricious and arbitrary.
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If Obama/Democrats wanted to raise taxes on capital gains and dividends in 2009 and 2010, he could have as he controlled the house and had a filibuster proof senate. Problem is that both times his advisers made it clear that would be stupid economically as it takes money out of the free economy. For two straight years we hear about this and in the end the rates werent touched. For the last time. Corporate income to which is where Romney made his money, is taxed at 35% for Federal and combined approximately 40%. When that money goes into your pocket, its likely taxed at over 50%. If we did not have double taxation.
If Romney paid his capital gains at ordinary rates you would be looking at an effective rate of almost 70% on the earnings (rather than 52%). Under such a policy there would be absolutely no reason for Romney or any person with money to invest in corporations. The result to the economy would be the transfer of trillions of dollars out of the private sector…the result of that transfer would be massive layoffs as companies would no longer have the backing. Without income, there would be no money into the treasury. In the mean time an opportunistic nation would likely open its doors for companies to relocate, with Americans wanting to flee to that country.
Obama is trying to raise capital gains to 20%. Perhaps this might be feasible if we were experiencing an economic boom and were trying to sure up some obligations. But we have a stock market being propped up by QE3 now, said another way the last thing we need is to kill the private sector by scaring rich people away.
So keep focusing on Romney’s tax returns…there are bigger issues out there!
[...] shocked!! — that we got through an entire debate without Obama referencing Romney’s 13.9% and 14.1% effective tax rates in 2010 and 2011, respectively, or attacking Romney’s unwillingness to make public his tax returns from prior [...]