The Romney campaign did not just dump the Romney 2011 final 1040 on us Friday, providing us with hundreds of pages of mosty pointless disclosure forms. They also gave us a two page letter from PricewaterhouseCoopers (PWC), which has prepared the Romney returns since 1990. There is an old accounting joke. A business owner is interviewing potential accountants by asking them what two plus two is. Most innocently answer four. One accountant leans back, strokes his chin and says “What number did you have in mind ?” Who do you think got hired ? I don’t know what made me think of that joke. Just kind of popped into my head. Anyway, back to the letter. I guess the point of the letter was to answer questions that have been raised about Romney’s taxes – without actually answering them.
Beginning at the end, right before the notarization, there is a statement signed by Diana Weiss, the General Counsel of PWC certifying that the letter has been signed by the firm and is an authentic document prepared by the firm. Accountants can over-dramatize our lives a bit, so saying that a lot of blood, sweat and tears went into this document is overdoing it. Nonetheless, it is safe to say that a tremendous amount of work probably went into crafting this document. The computations involved could be done, checked, double checked and triple checked in a day. They were probably done by people who had at least the equivalent of a masters degree. The computations require about a sixth grade education. The nuances and assessments of exposure would have required the engagement of minds of the highest level, though. I’d love to find out how many dollars at PWC standard rates went into this letter, regardless of what the firm charged the Romney campaign. Actually, it would also be interesting to know whether they “value billed’ the engagement. What does the document tell us?
1. Since 1990 there was no year in which the Romneys did not owe federal and state income taxes.
2. The lowest “effective personal income tax rate” (EPITR) for any year was 13.66%. EPITR is not, to my knowledge, a defined term in the Internal Revenue Code. Apparently the Governor or his staff provided PWC with the definition to use – “total taxes owed divided by adjusted gross income as shown on the federal income tax return as prepared.”
There are a couple of additional percentages provided, but the above two statements are the ones that seem to excite the most interest. To explain why this letter, which I have no doubt is absolutely accurate, does not tell us much about Romney’s taxes for the last twenty odd years you might want to crack open his 2010 return and follow along. Go to page 2 of the return, which is page 6 on the link that I provided. Adjusted Gross Income on Line 38 is 21,646,507. That is your divisor. The income tax computation stops at Line 55 and is $2,976,345. If I were computing EPITR that is the number I would use, which would yield 13.7%. PWC was instructed to use “Total tax” which is on Line 60 and amounts to $3,009,766. That number includes both self-employment tax and payroll taxes on household employees, neither of which are income taxes. If the point of this exercise is to compare Romney’s rate of income tax to that of working stiffs, it is not the right number since working stiffs mostly have social security withheld, which does not show up on their income tax form, and don’t have household help that they have to pay payroll taxes for. The difference is small in 2010. Using Line 60 boosts EPITR to 13.9%, but what about the years for which we do not have the detail ?
Why is this so unrevealing ? As I have explained elsewhere if you really want to affect your tax liability, you need to be looking at page 1 of Form 1040, you can scroll there, if you want to follow along. Note line 37 is adjusted gross income, which will be carried to Line 38. The real action is above Line 22, since the various subtractions that convert “Total Income” to “Adjusted Gross Income” are hedged by a variety of limitations and usually require a dollar for dollar outlay of cash. See that negative number on Line 17. Add a couple of zeroes to that. That big positive number on line 13. Put in negative $3,000 instead, which we know is what was there in 2009, since there was a capital loss carryover going into 2010. That is what you need to do if you really want to reduce that total income tax on Line 55. Of course when you are doing that you are reducing the numerator of the fraction that you want to keep over 13%. Not good. You are also, however, reducing the denominator. As that denominator is going down those non-income taxes you included in the numerator become more and more significant. If you drive AGI down to low six figures they might be enough to keep you above 13% all by themselves.
Romney could have told people it was none of their business what his taxes were before 2010. He could have provided complete copies of twenty years worth of returns or redacted copies, if there is information on the returns that he has a duty to not disclose. There is speculation that Romney might have engaged in Son of Boss deals or other sketchy tax shelter transactions. Well, now there is a spreadsheet with 40 interesting numbers on it which PWC has boiled down to a few percentages. You have 20 years of adjusted gross income and twenty years of total tax. Why not release those two series ? Is it because the twenty years worth of adjusted gross income would be difficult to reconcile with a net worth of $250,000,000 ?
Whenever people talk about percentages when the raw numbers are readily available, my bs detector goes into high gear. This report from PWC makes me think it is more likely that Romney engaged in some transactions that at least in retrospect would be considered sketchy. I certainly can’t fault PWC for the report. If you read it carefully, it is clear what it is and is not telling you. As a matter of fact I’m hoping that they may have invented a new service. Whenever someone of large affairs runs for office, they can request a prestigious firm to prepare a “Romney letter” for them in lieu of disclosing many years worth of returns, which may contain sensitive information. It would certainly make life easier for us poor tax bloggers with day jobs.
You can follow me on twitter @peterreillycpa.
Originally published on Forbes.com on September 24th, 2012