Saturday, August 11, 2012

Explaining Mitt Romney’s Taxes as Best One Can – Without Having Any Knowledge of Mitt Romney’s Taxes

James B. Stewart in the New York Times Takes a Stab At It

By refusing to release his tax returns for any years prior to 1010 Mitt Romney has created an issue for his campaign all by himself.  Mr. Romney’s ostensible reason for not releasing the returns is that he thinks they will give his opponents material to attack him, which is a puzzling statement since it reveals the fact that Mr. Romney must think there is information in the return with which to attack him. 

So the issue continues to dominate the campaign, leading to such things as Sen. Majority Leader Harry Reid charging that his source states that Mr. Romney paid no income taxes in the 10 years prior to 2010.  Without the evidence or the source to back it up, most people think this is a silly position, and it has been heavily criticized.  But it has lead to speculation about how Mr. Romney might have paid a very low tax rate, particularly for 2009.

James Stewart is a sometimes excellent financial reporter, and he speculates, with the aid of tax experts, in the New York Times on how Mr. Romney might have paid a very low rate in 2009. 


Can People as Rich as Romney Escape Taxes? They Can.


Published: August 10, 2012
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 would it even be possible for someone who makes millions of dollars a year?

First of all apparently it is possible to have extremely high income and not pay any income taxes.

It so happens that this summer the Internal Revenue Service released data from the 400 individual income tax returns reporting the highest adjusted gross income. 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.

But it is not easy.

The first key to low taxes is to have capital gains, which are taxed at a very low 15% rate and then to have capital losses carried forward from a prior year.  For example, if Mr. Romney had $30 million of capital loses in 2008 and only $10 million of capital gains, he would $10 million of the loss to offset the $10 million gain in 2008 and could carry the unused $20 million of capital losses forward to 2009.  If he had $20 million of capital gains in 2009 and no losses, the remaining $20 million of losses would fully offset the $20 million of gain and his tax on the $20 million of gain in 2009 would be zero.

But there are a couple of issues here.  First off, capital gains are reported on the tax return net of capital losses, so his return in 2008 and in 2009 under the above circumstance would not show any capital gains income.  Also, there is nothing special here.  In the above example over the two years Mr. Romney would have had $30 million in gains and $30 million in losses.  No net capital gains income, no capital gains tax.  In the mind of a reasonable person, no problem.

So what else could be going on here with Mr. Romney’s taxes?  Well we do know that Mr. Romney is very generous to the Mormon church, so those contributions reduce his taxable income.  Not a big deal, if he gave away the income he doesn’t have the use of it and he doesn’t pay tax on it.  Again no problem.

What is left for probable problems for Mr. Romney are tax shelters and foreign bank account shenanigans.  Here is Mr. Stewart.

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.

Mr. Romney has been taken to task for an abusive tax shelter used by Marriott International in 1994 while Mr. Romney was on the board and audit committee there. But there’s been no direct evidence he knew the details, and in any event, the I.R.S. started cracking down on such shelters in 2000, making it highly unlikely Mr. Romney would have embraced the strategy for his own returns within the past decade.

And here is where we differ with him.  Mr. Stewart seems to think Mr. Romney would not have used aggressive tax shelters, but we think otherwise.  One thing that we know about Mr. Romney is that he is extremely greedy with respect to generating income (his supporters actually regard this as a plus). No other Presidential candidate in history has been so driven to make money, regardless of the how or why.   In 2009 and in prior years he may well have not decided yet on a Presidential run, and may well have used aggressive and possibly illegal tax shelters combined with foreign investments and Swiss and Cayman Island and other off shore accounts to dramatically reduce his taxes.

Would Mr. Romney have been that short sighted, that greedy, that grasping for income  more than the of millions he already had and and would he have no suspicion that he couldn’t get away with it and still run for President?  Well nothing he has said or done in the past would make anyone believe that was not the case.

1 comment:

  1. Romney sought the Republican nomination in 2008 and lost to McCain, so given his age and McCain's performance in the general election, it seems peculiar to speculate that "In 2009 and in prior years he [Romney] may well not have decided yet on a Presidential run..."