My personal Rafalcagate, where my ignorance of the multi-stage nature of dressage, caused me to call the Romney horse out too soon, has me thinking about Mitt’s returns again. The big controversy now is the call for him to release another decade’s or so worth of returns. I’m really hoping he does not, because I will feel compelled to look at the damn things and I really get enough of looking at returns like that on the day job. Here is 2010, all 203 pages of it, I don’t want another couple of thousand.
What enormity might we discover ? What is being held back from us ? There is speculation that Romney might have paid no federal income taxes for as many as 10 years. Oh my God ! The Horror ! That would be like finding out that there is gambling going on at Rick’s
How Could Mitt Could have Paid Paid Zero And Not Make Me Mad At All ?
If you look at Mitt’s 2010 return you see over four million dollars in itemized deduction. About three million of that is charity (One commenter not content with mocking my dressage ignorance, called me out on that saying that LDS is not a charity. He can go pound sand. It says charity on Schedule A and that is good enough for me.) When he was on his way up he probably had some sort of healthy salary, but probably not over eight million in interest and dividends. I’m not going to get into AMT and the AGI limits on charitable contributions, which would get in the way, but regardless of those, I could see there being years in which Mitt’s itemized deductions might wipe out his ordinary income. Over a long period of time, I would be surprised if Mitt had positive capital gains every single year. One of the ironies of our system is that it is very hard to have big losses if you don’t have a lot to start out with. A couple of bad years in there with itemized deductions wiping out ordinary income and you have zero tax. And you are not at all pleased about it.
Let’s say there was never a bad year, though, how else could there be zero tax with nothing nefarious going on? There are three fairly simple principles. I have not read of any tax reform proposals that have any traction that address any of the three principles. The three principles are:
1. Partners have basis in their share of a partnership’s liabilities.
2. The proceeds of debt are not gross income.
3. Unrealized appreciation is not gross income.
I won’t go deeply into number one other than to indicate it means that with respect to his share of a partnership’s activities it is, as if, Mitt is doing whatever the partnership is doing personally. If the partnership borrows money and distributes it to him, it is, for tax purposes, as if he borrowed the money himself. The wealth building potential of these principles is not something that only the ultra-wealthy get to access. If you have seen late night commercials about how to get rich in real estate, these are some of the principles that are at work. It actually can work, but the late night commercials are less than forthright about the amount of effort and risk involved. There is also a dark side, though. Many people wrongly call it “negative basis“. The better term would be “minimum gain”. If you have had losses or distributions funded by unrealized appreciation you may at some point find that the asset has more tax liability associated with it than it would yield in cash on liquidation.
This is admittedly speculative and venture capital is different from real estate, so I may be putting out an unrealistic scenario. I am suggesting though that you can get very wealthy without realizing a lot of income. Warren Buffett is a good example.
How Could Mitt Have Paid Zero And Have It Just Make Me A Little Mad ?
In a recent post I discussed the possibility that Romney was in Son of Boss deals. I found those deals rather offensive, because they showed no respect for double entry. In one post I called it Debit by the Window – Credit Out the Window. Although, I would challenge Mr. Romney to cowboy up like Tim Geithner did and pay any possible deficiencies even though the statute has run on them, I can’t hold it against him if he did use Son of Boss deals to shelter his income. They were reasonably respectable until about the turn of the millennium. He has said that he pays all he owes and not a penny more. Marriott, when he was on the audit committee, was doing Son of Boss deals, why not do them himself ?
There is nothing inconsistent with his ideology about arranging his own affairs to pay as little tax as possible even if that brings him to zero. The idea is that money in the hands of capitalists goes to productive uses and money in the hands of government bureaucrats is squandered. I even have a little sympathy for that view as I explained in “We Won’t Get Ahead By Taxing Warren Buffett More – Jennifer Aniston Maybe”, the people’s choice for my best post. Of late, I have been less pleased with the people who live by allocating capital, though. If we have high unemployment and ordinary investors don’t get much of a return, they are letting the rest of us down.
In conclusion, Romney might have some zero tax returns either by accident or on purposes. That would not be at all inconsistent with what we already know about him and should not really influence us one way or the other.
Political Bias ?
Some of the commenters on my Rafalca piece have accused me of political bias. I’m a little sensitive to that and I think I should give a summary of my political and social philosophy, which I draw from Brendan Beehan:
I have a total irreverence for anything connected with society except that which makes the roads safer, the beer stronger, the food cheaper and the old men and old women warmer in the winter and happier in the summer.
I reviewed my posts and have found that I have probably been harder on President Obama than anyone, other than Tim Geithner, whose turbo-tax testimony has become a recurrent trope on my blog.
See for example:
Left Should Challenge Obama, Not Romney, on Carried Interest
Does Obama Return Make Michael S Solheim “First Accountant” ?
Could Romney Use His Own Return to Call Obama’s Bluff on Carried Interest ?
I have also defended Romney:
People Who Criticize Romney’s Extension Are Showing Their Ignorance
Of course people might think referring to Dogs Against Romney is an indication of bias. Sorry, that is the irreverence at work. I’m still not sure who I am going to vote for, although I did get a little nudge Friday night. My daughter and I visited Gettysburg for the umpteenth time. Poor kid had to put up with me standing around where Chamberlain must have stood and saying “Fix bayonets. We’ll have the advantage of moving down the hill.”
As I was talking to one of the shopkeepers about what a mob scene it is going to be for the sesquicentennial next July, he reminded me that whoever is President will be presiding at the sesquicentennial of the Gettysburg address in November of 2013. I thought how awesome it will be if our first black President is the one. On the other hand, getting the Republicans to remember that they are the party of Abraham Lincoln could also be salutary.
You can follow me on twitter @peterreillycpa.
Originally published on Forbes.com on August 5th, 2012