What is Romney Hiding?

I think I would just settle for seeing Romney's 2008 & 2009 tax returns and call it a day...

In Superrich, Clues to What Might Be in Romney’s Returns
By JAMES B. STEWART

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 for someone who makes millions of dollars a year, would it even be possible?

Evidently it is.

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.

The I.R.S. has never before disclosed that last fact.

Not even Mr. Romney, with reported 2010 income of $21.7 million, qualifies for membership in this select group of 400. But the data provides a window into the financial lives and tax rates of the superrich. Since the I.R.S. doesn’t release data for the tiny percentage of Americans at Mr. Romney’s income level, the 400 are the closest proxy.

And that data demonstrates that many of the ultrarich can and do reduce their tax liability to very low levels, even zero. Besides the six who paid no federal income tax, the I.R.S. reported that 27 paid from zero to 10 percent of their adjusted gross incomes and another 89 paid between 10 and 15 percent, which is close to the 13.9 percent rate that Mr. Romney disclosed that he paid in 2010. (At the other end of the spectrum, 82 paid 30 to 35 percent. None paid more than 35 percent.) So more than a quarter of the people earning an average of over $200 million in 2009 paid less than 15 percent of their adjusted gross income in taxes.

How do they do it?

The data show that the ultrarich typically pay low tax rates every year, but 2009 was a special case. In 2008, people with large stock portfolios and other less liquid assets were disproportionately hit with large losses on paper. One of the oddities of the tax code is that capital gains taxes are discretionary, since they must be paid only when gains are realized. And they can be offset by losses. The silver lining in a bad year like 2008 for wealthy people is that they can “harvest” losses by selling assets, then use those losses to offset any gains. They can also carry forward the losses to offset gains in future years.

There’s ample evidence that happened in 2009 among the richest taxpayers. Their average income, $202 million, dropped from $270 million in 2008 and was the lowest since 2004. Like Mr. Romney in 2010, for the richest taxpayers most income comes from capital gains and other investment income. Their net capital gains (the data doesn’t include gross gains and losses) dropped by nearly 40 percent, from an average of $154 million in 2008 to $93 million in 2009, which accounts for nearly all of their drop in total income. Even with these lower gains, these 400 taxpayers, a minuscule fraction of the population at large, still managed to account for 16 percent of all capital gains. That is the highest percentage since the data was first released for 1992, when that percentage was less than 6 percent.

Tax experts I consulted said these results almost certainly reflected aggressive use of tax-loss carry-forwards from 2008, since the stock market bottomed in March 2009 and rallied strongly during the rest of the year.

The superrich also accounted for a disproportionate amount of dividend income, which averaged over $26 million for the top 400, or over 6 percent of total dividend income, also a record. Capital gains and dividends are both taxed at a maximum rate of 15 percent, as opposed to the maximum rate on earned income of 35 percent, which helps explain why so many of the superrich pay a relatively low rate. Still, that preferential rate doesn’t get them anywhere near zero, or even 10 percent.

Edward Kleinbard, professor of law at the Gould School of Law at the University of Southern California, explained it this way, “You start with income dominated by tax-preferred income — capital gains and qualified dividends. That gets you to 15 percent. Then you use charitable contributions of appreciated securities to reduce ordinary income. But the charitable contribution deduction is capped at 50 percent of adjusted gross income. Now you’re way down, but you’re not at zero.”

What does it take to get to zero, or close to it? According to Professor Kleinbard, there are only two additional ways: tax loss carry-forwards to offset capital gains, and tax shelters, many of which have been deemed abusive by the I.R.S., to offset any remaining ordinary income after other deductions.

(Other possibilities are the foreign tax credit and general business credit, but total tax credits averaged only $2.4 million for the top 400, and neither would seem to be of much benefit to Mr. Romney.)

Since Mr. Romney seems to have had relatively little ordinary income since leaving Bain Capital, he may have been able to get to a very low rate in 2009 using tax loss carry-forwards from 2008 to offset capital gains and charitable contributions to offset up to 50 percent of his ordinary income. 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 last decade.

He’s also been faulted for treating a horse partly owned by his wife as a loss-generating passive investment, rather than as a hobby. Even though that had little effect on his overall tax liability, Professor Kleinbard contends that that and other tax avoidance measures demonstrate a propensity to engage in aggressive tax strategies.

But even Professor Kleinbard doubts that Mr. Romney paid no income tax. “It’s possible theoretically that Romney didn’t pay, but improbable,” he said. Far more likely is that he paid a very low rate that would generate renewed criticism.

This may help explain why Mr. Romney is refusing to release more of his own returns, especially those for 2009. On the face of it, his stubbornness is perplexing. The electorate already knows that he’s immensely wealthy and that he pays a very low tax rate compared with many people who make far less.

There’s no reason to fault Mr. Romney for taking advantage of loopholes the tax code offers the superrich, however ill advised they may be as a matter of public policy. Mr. Romney didn’t make the law, and he’s called for broadening the tax base, which presumably means eliminating some of the breaks that benefited him. He could easily speak to that issue, since who would know better than he does which loopholes should be closed?

Senator John McCain, the former Republican presidential candidate who received 23 years of Mr. Romney’s returns as part of the vice-presidential vetting process in 2008, has volunteered that “I can personally vouch for the fact that there was nothing in his tax returns that would in any way be disqualifying for him to be a candidate.” Something that would disqualify, him, as opposed to merely alienating voters, may be a pretty high bar, but presumably it rules out anything illegal or unethical. Senator McCain declined to be more specific.

Which leaves plenty of room for speculation, informed or otherwise. Senator Reid of Nevada, the majority leader, set off a media storm when he told The Huffington Post the week before last that a former Bain Capital investor had told him Mr. Romney “didn’t pay any taxes for 10 years,” adding, “I’m not certain” if that’s true. It can’t be — Mr. Romney must have paid sales, property and other taxes. Presumably Senator Reid’s unnamed source meant that Mr. Romney paid no federal income tax for years.

The candidate promptly denied the claim, saying he had paid taxes every year. Still, he was vague, telling ABC News he “couldn’t remember” whether he paid less than his 2010 federal income tax rate of 13.9 percent in some years and didn’t specify which taxes he meant.

And when Senator McCain said there was nothing “disqualifying” in Mr. Romney’s returns, he would not have seen Mr. Romney’s returns for 2009, which were filed after his vice-presidential vetting.

As long as Mr. Romney withholds his returns, continued speculation, and even outlandish conjecture, will probably flourish. “It’s reinforced my view that he’d be better off just releasing the returns rather than having people blindly speculating,” Leonard E. Burman, a tax specialist and professor of public affairs at the Maxwell School of Syracuse University, told me this week. “It seems like one of those slow-drip water torture things, and eventually he’s going to have to do it.”

For the record, I paid total tax of 37 percent in 2010 and 33 percent in 2011. And should there be a groundswell of interest, I’ll release my results for as many years as anyone wants. I haven’t done the calculations for years before 2010, but I’d be surprised if they’re much different.

What’s abundantly clear, both from Mr. Romney’s 2010 returns and from the returns of the top 400, is that at the very pinnacle of taxpayers, the United States has a regressive tax system. The top 400 earn more than 1 percent of all income in the United States, more than double their share in 1992. These 400 earned a total of $81 billion in 2009 — but paid an average tax rate of just 19.9 percent.

“It’s regressive because capital gains and dividends dominate the top returns and are taxed at a preferential rate,” Professor Kleinbard said.

Professor Burman added: “Our tax code has a number of flaws, one of which is that it doesn’t do a very good job of discriminating based on income. It is progressive over all, but very high-income people can pay very little tax. How they avoid tax is an important and legitimate issue we should be talking about.”