1% Problems

Romney Cut Deductions on 2011 Taxes to Maintain Campaign Pledge

Romney had to forgo $1.8 million in 2011 deductions to stick to campaign promise.

Now we know why it took so long for Mitt Romney’s accountants to prepare his 2011 taxes. As his financial trustee, R. Bradford Malt, explained to me in an interview last week, they had to wait until all the partnerships Romney owns—and all the partnerships that those partnerships own in turn—filed their financial data before getting to work. Then they had to tally all Romney’s deductions. And then, it turns out, they had to reverse-engineer the tax return so that it conformed with Romney’s political rhetoric.

Let me explain.

The rate at which Romney pays taxes has been a matter of some dispute—and a political football. Once the Bush tax cuts fully phased in, taxes on dividends, capital gains, and the carried interest returns that private equity partners reap—investment income—were privileged above ordinary income made by working stiffs. Investment income is taxed at a rate as low as 15 percent. And Romney, who essentially stopped working in 2007 to run for president and has been subsisting ever since on investment income, makes most of his money from investments. So in 2010, he reported an effective tax rate of 13.9 percent on $21.6 million in income.

That’s low. But critics suspected that in prior years he had paid even less. Sen. Harry Reid said that someone had told him that there were years in which Romney paid no taxes at all. And that, Reid and others charged, was one of the reasons Romney was reluctant to release tax returns before 2010. Romney rubbished these charges, and in August stated emphatically that he had never paid an effective tax rate of less than 13 percent of his income.

That must have caused some heartburn among the team of auditors doing Romney’s 2011 return. Here’s why. Before releasing the whole shebang, the Romney campaign Friday afternoon released some talking points about Romney’s 2011 return.

They included the following: in 2011, the Romneys had $13,696,951 in income, mostly from investments. They paid $1,935,708 in taxes, giving them an effective tax rate of 14.1 percent. The Romneys donated $4,020,772 to charity—nearly 30 percent of their total income, which is very impressive indeed. Next, however, trustee Malt notes that “the Romneys claimed a deduction for $2.25 million of those charitable contributions.” In other words, they didn’t take a deduction for nearly $1.8 million in charitable donations— donations for which they would have been perfectly entitled to take deductions. If the Romneys’ income were taxed at the 15 percent rate levied on investment income, that means the Romneys needlessly paid an extra $270,000 in taxes. If their income was taxed at the top marginal income tax rate of 35 percent, that means they needlessly paid an extra $630,000 in taxes.

For most clients, the accountant’s only job is to make them as wealthy as possible within the bounds of the law. But for Romney’s accountant, this year the job also included a mandate to not turn a presidential candidate into a liar.

Had the Romneys taken the full allowable deductions for their charitable donations (assuming a tax rate of 15 percent) they would have paid significantly less in taxes in 2011—about $1.665 million instead of $1.936 million. Given income of $13.7 million, that would have left the Romneys paying a 12.1 percent effective tax rate in 2011. Nice work. But that’s less than the 13 percent that Romney had promised. And they couldn’t have that. So the accountants had to go back, recalculate, and choose not to take nearly two million dollars in allowable deductions. As Malt notes, “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.”

For the first time in a couple of weeks, the Romney campaign seems to have managed scoring an own goal. But the optics on this are still pretty bad. Yes, the Romneys give a lot of money to charity. But somehow a guy who was unemployed for virtually all of 2011 managed to make $13.7 million—and pay an effective tax rate of less than 14 percent on it. And we’re the ones who aren’t contributing our fair share?