Asymmetrical Information - Megan McArdle

09.21.12

Romney Drops His Tax Returns

Mitt Romney has released his 2011 tax returns, and a summary of prior year payments from his accountant. The result is surprisingly unsurprising.

In a classic late Friday afternoon "garbage dump", the Romney campaign has dropped his 2011 tax returns.  The return is 379 pages, and it's an image, so you can't search for numbers or even pages. This makes reading it slow going.  It also means I've had to retype everything, so apologies for any typos.

A summary of the salient facts:  

  • The Romneys had total income of $13,709,608 and Adjusted Gross Income of $13,696,951
    • $3,012,775 in taxable interest income, and a negligible $1,329 in non-taxable interest, presumably from muni bonds
    • $3,649,567 in dividends
    • $352,905 in state and local income tax rebates (counted as income because normally he would have taken a deduction on them in earlier years)
    • $450,740 in business income
    • $6,810,176 in capital gains
    • $484,572 loss on an asset sale
    • $120,375 in S-corp or real estate income
    • $202,358 loss related to that state and local income tax refund (which he apparently didn't deduct in prior years) less some loan forgiveness.
  • The Romney's medical expenses of about $15,000 are surprisingly low considering that Ann has MS.
  • The Romneys have a whole lot of accounts in the Caymans and elsewhere--I feel like I spent half an hour paging through form 8621s, which gave no information other than the fact that . . . they have a lot of accounts in the Caymans and elsewhere.  Which we already knew.
  • The Romney's gave about $4 million to charity, or around 30% of their AGI.  However, they only deducted $2.25 million, so that their effective tax rate would be 14.1%.

Most of the rection so far has been to the Romney's deducting less than he could have, in order to bring his effective tax rate up.  In effect, by my calculation, he paid somewhere between $200,000 to $300,000 to the US government just so he could say his effective tax rate was 14.1%.  That's rather amazing, and triggered a response that was aptly summed up by a friend:

"I 'm just finding it extremely amusing that after months and months of people treating Romney's effective tax rate as not just an illustrative case of a policy dispute but as a personal failing, these very same people are acting as if he did something wrong and/or inscrutable by voluntarily paying extra taxes (by, of all things, undercounting his ridiculously generous charitable contributions) to push his effective tax rate up. It's honestly like something out of "Mean Girls" where the popular kids would make fun of a girl for being frumpy, then call her a slut when she tries to dress more stylishly. In this metaphor, Romney just dropped about a million dollars at Forever 21 yesterday only to come home and cry into his pillow today."

Romney still has a low effective tax rate, because he has a lot of capital income, and donates a lot of money to charity.  You can argue over whether we should tax capital gains more highly (I favor eliminating the corporate income tax and then taxing capital income at ordinary income tax rates, but Matt Yglesias makes the "No" case here).  You can rail at the existence of charitable deductions, a question on which I can see both sides.  But this is the source of his low income tax rate.  There's no ultra-sophisticated nefarious scheme, or at least, not one that's readily visible on his tax returns.  Early in his life, Romney deferred a lot of consumption by saving, in part undoubtedly because his large income made doing so rather painless.   Fair or not, that's tax advantaged behavior in every modern economy that I'm aware of.  

The Romney campaign also dropped this letter from his accountant:

  • PriceWaterhouseCoopers, providing a summary of his tax returns from 1990 to 2009:  Each year during the period there were feeral and state icnome taxes owed.
  • That is, there were no years during the period in which you did not owe both federal and state income taxes.
  • PricewaterhouseCoopers LLP is not aware of any outstanding income tax amounts for the period owed tothe Internal Revenue Service or to any state tax authority.
  • The lowest of any annual "effective federal personal income tax rate" for any year during the priod is 13.66%.
  • As you requested, we computed each annual "effective federal personal income tax rate" as total taxes owed divided by adjusted gross income as shown on the federal income tax returns as prepared.
  • The average of the annual "effective federal personal income tax rates" as computed based on the returns as prepared during the period is 20.20%
  • The average of the annual "effective state personal income tax rates" as computed based on the returns as prepared during the period is 8.36%. "Effective state personal income tax rate" is computed as total state taxes reported as a deduction divided by adjusted gross income as shown on the federal income tax returns as prepared during the period.
  • The average of the annual "Effective charitable deduction rates" as computed based on the returns as prepared during the period is 13.45%. "Effective chartiable deduction rate" is computed as total charitable deductions divided by adjusted gross income as shown on the federal income tax returns as prepared during the period.
  • Total federal income taxes owed, total state income taxes reported, and total donations deducted during the period represent 38.49% of your total adjusted gross income for the period.

You can expect some talmudic readings of this by those who defended the idea that Harry Reid totally could have had an anonymous friend with secret knowledge about Mitt Romney's tax returns, and you can't prove otherwise!  Ignore them.  

This is pretty definitive: For the past twenty years, Mitt Romney has paid income taxes at an effective rate at least as high as what he paid in 2010, and often much higher.  He has had taxable income in every year. Harry Reid's friend was either lying or gravely mistaken, and Harry Reid, who is himself rather plump in the wallet, should have known better than to repeat such nonsense without better sourcing.

Which was what I always expected.  Tax skulduggery is mostly about keeping income off your tax returns (i.e., hiding it from the tax man).  Tax avoidance--the legal kind of tax dodging--is mostly about transforming income from something that's taxed at a higher rate (like wages) to something that's taxed at a lower rate (like capital gains).  This sort of transaction attracts attention (and often pushback) from the IRS when it happens on returns as large as Mitt Romney's.  I'm not saying that he's never succeeded in pushing the envelope, or that his tax rates shouldn't be higher.  But it's unlikely that he's managed to sneak something outright illegal past the hawk-like eyes of the IRS.  And other than buying tax-free munis, or having huge prior-year losses, there are no good ways to get yourself an effective tax rate of zero when you make as much money as Mitt Romney does.

Of course, the question still remains: why won't he release his returns?  There's one thing notably absent from the PWC letter: income amounts.  It would be nice to know the lowest reported taxable income, and the year that occurred.

 Romney's defense of his decision not to release the returns--that they're complicated and he doesn't want to spend the rest of the campaign trying to explain tax law to reporters who very clearly do not understand how it works . . . well, it's not entirely implausible.  But it's not entirely satisfying either.  Until he releases them, he's going to be dogged by the suspicion that his 2009 return shows him taking advantage of the amnesty for holders of secret Swiss bank accounts, or that some other questionable issues lurk in his history.  

That's a legitimate complaint. Among the less compelling complaints you can expect to hear:

  • The denominator is too low.  During the last round of Romney Taxmania 2012! I saw a number of people complaining that he was calculating his effective tax rate using AGI rather than total income--or even more incredibly, that he should have included his gross business income (before expenses) or all his capital gains--i.e., the net increase in his wealth over the year--rather than his realized capital gains. 
    • As far as I know, TaxPaid/AGI is the standard method for calculating effective tax rate
    • The total income on his return is only negligibly higher than AGI, so it wouldn't have changed the calculation
    • Asking him to include gross business income, or unrealized capital gains, just seems gravely silly.  No one calculates their taxable income this way, for good reasons.  If you have to ask why, imagine paying taxes to the IRS every time the value of your house went up.
  • All his donations are to the Mormon church.  One, he still doesn't have the money to spend--the church does--which is why it's deductible, and two, the Mormon church runs an incredibly large private charity network, which is more than one can say of the colleges and museums who collect a great deal in the way of charitable donations.  
  • He only upped his giving when he knew he was running for president.  Everyone does this, but Romney was already giving 7-10% of his income to charity every year; his donations went from "generous" to "truly munificent".  If you want to complain about this sort of thing, go talk to Joe Biden, who was giving a few hundred dollars a year off a comfortable six-figure income, or the Obamas, who were giving $1-2K on same. (To be fair, the Obamas are now giving more like 20%.  The point is that this is a bipartisan practice--and Mitt Romney was giving generously before he knew he'd be releasing his tax returns)
  • His blind trust doesn't count because it doesn't meet federal guidelines because it's run by his personal lawyer.  A totally legit complaint--on January 29, 2013, when he is inaugurated as president.  Before then, he's not even obligated to have a blind trust of any sort.

The most interesting thing is actually how little he's structuring to avoid taxes.  No significant income from muni bonds, which I would have expected from someone in his tax bracket.  Not a lot of complicated exchange deals to try and minimize his tax burden (though as I say, those may have occurred sometime in those missing returns . . . one plausible theory I've heard about his reluctance to release involves structuring his estate in order to pass as much as possible to his sons, tax free).  

Overall, this package seems to tell us what we already know:  Mitt Romney makes a huge amount of money, most of it in capital income.  My salary, and probably yours, is a rounding error on his tax return.  Some accountant is making a lot of money of him.  And as Ezra Klein points out, he didn't even have a job in 2011.

I was expecting to end this by saying that he doesn't go out of his way to pay extra taxes, but it turns out, he actually did. (Though not, I think, because the US government is actually his favorite charity.) So I'll instead end by saying that in an ideal world, neither the tax code nor Mitt Romney's tax return would look exactly like this one does now.  But as far as I can tell after wading through it, in the world we actually live in, his tax planning seems to be entirely unremarkable and completely within the law.