By Peter J. Reilly
Romney Breaks From Republican Orthodoxly
Mitt “not a penny more” Romney with a guest essay in the New York Times arguing for taxing rich people like himself sort of threw me for a loop. During the 2012 presidential campaign, Romney’s tax disclosures and lack thereof were a major source of blog fodder for me. That is such a large topic that I am posting on it separately right after this. At any rate, Romney’s break from Republican orthodoxy and interest in preserving Social Security are refreshing, even if I am less than enthusiastic about some of his specific recommendations.
Tackling The Social Security Cliff
He starts off focused on Social Security, remembering that in the 2012 election political ads suggested that his policy proposals amounted to pushing Grandma off the cliff. Here is an example of that sort of thing, although it was directed against Paul Ryan.
Romney then has a sentence that strikes me as a little awkward “Today all of us, including our grandmas, truly are headed for a cliff.” Romney is 78 years old. His grandmothers died in 1926 and 1938. Anyway, he is focused on 2034 when the Social Security Trust Fund is scheduled to run out. That will cut payments by about 23%, since they will be limited to what is coming in. He suggests that the problem can only be addressed by both higher taxes and spending cuts, including benefit cuts for future retirees. He suggests future retirees should be subjected to means testing and the starting age for entitlements should be linked to American life expectancy.
Why Means-Testing Social Security Misses The Mark
I really think means testing Social Security is a terrible idea. It is already there in a sense through making benefits partially subject to income tax. Means testing social security could well make retirement saving seem pointless to people of modest means. On the Medicare front, we already have IRMAA which starts ramping up Medicare premiums at just over $100,000 in modified adjusted gross income. Also, the suggestion that current benefits are sacred while future benefits are up for grabs smacks of generational injustice. If there is going to be means testing on some but not all, it is Romney’s generation, which is also mine, that should be means tested and younger generation should have a program that is actuarially sound, but not means tested.
It is also worth noting that as far as I can tell few people are familiar with how social security benefits are computed. In the tax planning environment I grew up in FICA savings were always viewed as a win with no thought given to the impact on future benefits. That was probably a reasonable position in the circles I moved in, but nobody ever ran the numbers.
Romney’s Tax Hikes: Who Really Gets Hit?
Romney moves from the spending front to taxes.
He leads with raising the FICA maximum (currently $176,100). OK. This is not taxing rich people like him. Actually, this is not even taxing rich people, certainly not just rich people. There are probably a lot of people making over $200,000 who don’t even have positive net worth. I really think the people hit hardest by the tax system are relatively high-salary people who have not accumulated any wealth. The term for them is HENRY (High Earners, Not Rich Yet). And here is the really interesting thing. All the fancy things that rich people do to avoid taxes are generally unavailable to HENRY. So Romney’s opening bid is to tax moderately prosperous people who are not like him more.
The next thing he goes for is the step-up in basis on death. This is coming from a guy who is known for having over $100,000,000 in his IRA. No step-up there. My guess is that is going to charity. There is something here that confuses me. It seems like the mega-wealthy use a lot of techniques to keep stuff off their 706 (estate tax return). I don’t know how or whether you can do that while still getting the step-up. The only exception to that would be to the extent assets were leveraged. I see a lot of talk about the buy, borrow, die method of totally avoiding taxes, but it strikes me as extremely nerve wracking. Eliminating the step-up would really hurt people with net worth below $50 million or so whose net worth is mostly covered by the exemption. Oddly enough he makes a somewhat contradictory statement on the step-up when he says “This unusual provision makes sense when you are talking about helping families keep their family farms.” Actually, the step-up makes it easier for someone to sell the family farm and a strong incentive to keep it.
Romney also leans hard on our President’s wealth suggesting that 1031 exchanges, now limited to real estate, should go. More radically suggests that depreciation, particularly that which is funded by debt, should also go.
The next one that he takes up is state and local tax deductions which are not actually available to the very high income. Once again he is kicking HENRY with that one. Finally he mentions “carried interest” which was probably a big benefit to him on his way up.
Gaps In Romney’s Proposals
Among the things that he doesn’t mention is a stronger IRS with the people and technical chops to go after the complex maneuvers that are available to the ultra high net worth.
Echoes Of 2012: Romney’s Tax Legacy
Near the end he points out that “It is not that the rich, in these cases, are cheating the government; they are playing by the rules.” Yeah maybe.
There is some question as to whether Romney was actually playing by the rules on his way up which was a big issue in the 2012 campaign. I decided that I would treat that separately, so after this, be sure to read Revisiting Romney’s 2012 Tax Scandals: From Carried Interest to a Dancing Horse, in Light of His Tax-the-Rich Plea.
There is a paywall that it is worth getting behind to read some of my deeper pieces and that would be Think Outside The Tax Box.
For great value in continuing professional education be sure to check out Boston Tax Institute
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