Two articles today add important elements to the discussion of Romney's tax returns and his resistance to disclosure.
In the New York Times, Michael Graetz notes that "it is a good bet that Mr. Romney’s vetters have picked through more than two years of returns of his vice-presidential contenders. And the Senate typically requires more for confirmation to a cabinet or even a subcabinet post."
In addition, Graetz notes suggestive evidence creating a possible inference that Romney should have faced penalties (though one doubts they were actually levied) in connection with transferring to his sons financial assets that are now worth $100 million:
"Based on his aggressive tax planning, revealed in the 2010 returns he has released and his approval of a notably dicey tax avoidance strategy in 1994 when he headed the audit committee of the board of Marriott International, my bet is that — if Mr. Romney filed a gift tax return for these transfers at all — he put a low or even zero value on the gifts, certainly a small fraction of the price at which he would have sold the transferred assets to an unrelated party. Otherwise, he should be happy to release his gift tax returns. According to a partner at Mr. Romney’s trustee’s law firm, valuing carried interests, such as Mr. Romney’s interests in the private equity company Bain Capital, at zero for gift tax purposes was common advice given to clients like Mr. Romney in the 1990s and early 2000s.
"If detected, undervaluing large gifts to one’s children could provoke large penalties from the I.R.S. These are the kinds of tax penalties that even multinational corporations try to avoid because they fear how the public would react to the adverse publicity that would inevitably follow.
"To settle these questions, Mr. Romney should release his gift tax returns, or other documents showing how he valued his transfers to his family’s trust and to his I.R.A., and at least three additional years of income tax returns."
Meanwhile, in Forbes, Janet Novack focuses on an aspect of Romney's public rationalizations for his aggressive tax planning that has rankled both me and others with whom I've discussed the issues, but that had not as yet (to my knowledge) been addressed fully by anyone.
First she quotes a recent Romney TV interview in which he said: "I don’t pay more [taxes] than are legally due and frankly if I had paid more than are legally due I don’t think I’d be qualified to become president. I’d think people would want me to follow the law and pay only what the tax code requires."
The false implication here is that Romney simply mechanically or passively paid what was due under the law. Why should he, say, pay $10 million if the tax tables show that he only owes $5 million? But, as Novack notes, this amounts in actual practice to Romney's claiming that he has a "duty to exploit every tax loophole." She further adds:
"Unless Romney was joking ... it suggests he is either ignorant of the practical functioning (and malfunctioning) of our tax system; hopes the American public is ignorant of it; or has bought into an aggressive approach to tax-compliance that contributes to the tax mess.
"If you’re a simple wage-earner, as most of us are, there’s generally one correct answer about how much you owe in federal income tax. You might take advantage of more tax breaks than your neighbor–for example, electing to make bigger contributions to a pre-tax 401(k). But there’s not a lot of wiggle room in calculating what you owe. Unless you’ve entered the numbers incorrectly (or are confused about some issue the way Treasury Secretary Timothy Geithner said he was), Intuit’s TurboTax should give you the same answer as H&R Block’s AtHome and it should be pretty much the same as what the IRS would calculate.
"But when you are as wealthy as Romney, with as many business interests as he has, there are lots of judgment calls that get made involving how your investments are structured and reported—judgments that can increase or decrease a tax bill. What 'the tax code requires' and what’s allowed can be debatable. It is up to a taxpayer (in consultation with his tax pro) to decide how aggressive he wants to be and how many of the grey issues he decides in his own favor ….
"The attitude in some sophisticated circles that folks are chumps (or even negligent) if they don’t structure their affairs to exploit every possible provision of the tax code in ways Congress intended (and didn’t) creates a climate that allows abusive tax shelters to flourish and undermines the functioning of the tax code (which, granted, is plenty dysfunctional on its own.)"
Even without releasing more returns, Romney had made it clear as day where he stands on all this.
Unfair but balanced commentary on tax and budget policy, contemporary U.S. politics and culture, and whatever else happens to come up
Tuesday, July 31, 2012
Monday, July 30, 2012
Domestic and foreign policy under a President Romney
In response to Michael Tomasky’s Newsweek cover story, “Mitt Romney’s Wimp Factor,” liberal blogger Ed Kilgore argues the following:
“Precisely because conservatives have abundant reasons not to trust him, along with abundant reasons to believe they can bully him, Romney will perpetually be in what I call the “primary phase” of his political career. And that will make him a weak president who is never quite the leader of his own political party. That’s why I was suggesting in an earlier post today that whatever names appear on the signs at the Republican Convention in Tampa and on the bumper stickers of all those red-state SUVs, the real ticket is Ryan-Romney. This has nothing to do with Romney’s ‘manliness’ or ‘wimpiness,’ and everything to do with the devil’s bargain that’s brought him to the brink of his Oval Office dreams. “
This of course was Grover Norquist’s point several months back – that it really wouldn’t matter whether or not a newly elected Republican president (clearly meaning Romney) actually agreed with the Ryan approach, since all he has to do is not veto the legislation that two Republican-led houses would send him after shutting down any Senate Democratic effort at a Senate filibuster. (BTW, I continue to believe that, even in this scenario, the Republicans would be sufficiently leery of public opinion not to take any major whacks either at tax expenditures or at Social Security and Medicare spending over the next five to ten years. But I know some Republicans who disagree with this prediction.)
But there is one thing being left out in this scenario – foreign policy, where Romney would have a free hand, at least so far as military action is concerned.
In that light, consider the following warning at the end of Tomasky’s article:
“But if Romney is elected? Be nervous. A Republican sure of his manhood had nothing to prove. Reagan was happy with a jolly little shoot-up in Grenada, and eventually he settled down to the serious work of arms control, consummating historic treaties with Mikhail Gorbachev. But a weenie Republican – look out. He has something to prove, needs to reassert that ‘natural’ advantage [i.e., the Republicans’ claim to be stronger than the Democrats on national security grounds]. That spells trouble more often than not.”
Even without the pop psychology, this strikes me as a very plausible account of where Romney may conclude that he needs to go – especially considering his rhetoric, behavior, apparent beliefs, and choice of associates in the foreign policy realm so far.
“Precisely because conservatives have abundant reasons not to trust him, along with abundant reasons to believe they can bully him, Romney will perpetually be in what I call the “primary phase” of his political career. And that will make him a weak president who is never quite the leader of his own political party. That’s why I was suggesting in an earlier post today that whatever names appear on the signs at the Republican Convention in Tampa and on the bumper stickers of all those red-state SUVs, the real ticket is Ryan-Romney. This has nothing to do with Romney’s ‘manliness’ or ‘wimpiness,’ and everything to do with the devil’s bargain that’s brought him to the brink of his Oval Office dreams. “
This of course was Grover Norquist’s point several months back – that it really wouldn’t matter whether or not a newly elected Republican president (clearly meaning Romney) actually agreed with the Ryan approach, since all he has to do is not veto the legislation that two Republican-led houses would send him after shutting down any Senate Democratic effort at a Senate filibuster. (BTW, I continue to believe that, even in this scenario, the Republicans would be sufficiently leery of public opinion not to take any major whacks either at tax expenditures or at Social Security and Medicare spending over the next five to ten years. But I know some Republicans who disagree with this prediction.)
But there is one thing being left out in this scenario – foreign policy, where Romney would have a free hand, at least so far as military action is concerned.
In that light, consider the following warning at the end of Tomasky’s article:
“But if Romney is elected? Be nervous. A Republican sure of his manhood had nothing to prove. Reagan was happy with a jolly little shoot-up in Grenada, and eventually he settled down to the serious work of arms control, consummating historic treaties with Mikhail Gorbachev. But a weenie Republican – look out. He has something to prove, needs to reassert that ‘natural’ advantage [i.e., the Republicans’ claim to be stronger than the Democrats on national security grounds]. That spells trouble more often than not.”
Even without the pop psychology, this strikes me as a very plausible account of where Romney may conclude that he needs to go – especially considering his rhetoric, behavior, apparent beliefs, and choice of associates in the foreign policy realm so far.
Thursday, July 26, 2012
New publication
The International Bureau of Fiscal Documentation (IBFD), which is centered in the Netherlands but also has a U.S. office (contact info for both is available here), has just published a new volume, edited by Otto Mares and Dennis Weber, entitled "Taxing the Financial Sector: Financial Taxes, Bank Levies and More," available here either in-print or on-line.
It contains the papers associated with an excellent conference that was held in Amsterdam on December 9, 2011, at which I presented a first draft of my paper on the financial transactions tax and the financial activities tax. I blogged about the conference here, and the (later) version of my paper that was published in Tax Notes is available here. The IBFD volume has an earlier version of my paper, as I couldn't update it fully within the time window for going final, but there are also a number of other articles in the IBFD volume that academics, students, policymakers, and practtioners who are interested in financial sector taxation may want to see.
The other authors of papers in the volume are Oskar Henkow (Lund University), Martine Peters (IBFD, Amsterdam), Barry Larking (KPMG, Netherlands), Catalinia Hoyos Jimenez (U. Rosario, Bogota), Liesl Fichardt (Berwin Leighton Paisner, London), Paolo Ludovici and Mario Tenore (Maisto e Associati, Milan), Vincent van der Lans (Loyens & Loeff, Amsterdam), Daniel S. Smit (Tilburg University), Raymond H.C. Luja (Maastricht University), Rene van der Paardt (Erasmus University), and Thornton Matheson (IMF).
The volume is highly informative on financial sector taxes, not just in Europe (although that is the main focus), but also around the world.
It contains the papers associated with an excellent conference that was held in Amsterdam on December 9, 2011, at which I presented a first draft of my paper on the financial transactions tax and the financial activities tax. I blogged about the conference here, and the (later) version of my paper that was published in Tax Notes is available here. The IBFD volume has an earlier version of my paper, as I couldn't update it fully within the time window for going final, but there are also a number of other articles in the IBFD volume that academics, students, policymakers, and practtioners who are interested in financial sector taxation may want to see.
The other authors of papers in the volume are Oskar Henkow (Lund University), Martine Peters (IBFD, Amsterdam), Barry Larking (KPMG, Netherlands), Catalinia Hoyos Jimenez (U. Rosario, Bogota), Liesl Fichardt (Berwin Leighton Paisner, London), Paolo Ludovici and Mario Tenore (Maisto e Associati, Milan), Vincent van der Lans (Loyens & Loeff, Amsterdam), Daniel S. Smit (Tilburg University), Raymond H.C. Luja (Maastricht University), Rene van der Paardt (Erasmus University), and Thornton Matheson (IMF).
The volume is highly informative on financial sector taxes, not just in Europe (although that is the main focus), but also around the world.
Tuesday, July 24, 2012
Is Apple deliberately understating its earnings?
This MSNB story by Peter Svensson offers an interesting twist on U.S. companies' - or more specifically Apple's - international tax planning, and on an important interaction between U.S. tax and U.S. accounting rules.
The usual story, of course, is that U.S. multinationals defer U.S. tax by playing tax planning and reporting games to locate the income in tax havens. But for publicly traded companies, there's a problem. In theory, they will eventually have to pay the tax upon repatriating the earnings to the U.S.
What is more, if this is certain to happen and the U.S. repatriation tax rate will always be the same, they actually don't reduce the present value of the tax liability by deferring the repatriation. This is what the "new view" of dividend repatriations tell us - and it is a mathematically provable tautology under its assumptions. It does not, of course, refute the point that it's better to have further earnings on the earnings accrue in a low-tax foreign environment than in the higher-tax domestic one, but that's a separate issue. And the new view conclusion does not apply if one will never have to repatriate the funds, or if the future repatriation tax rate will be lower than the present one (e.g., in the case where it is zero, due to the adoption of a territorial tax system without transition features that result in collecting deferred taxes to date).
Anyway, back to the accounting bit. Even though it is often plausible to think that repatriation is in fact greatly reducing the expected negative value (if any) of the deferred tax, accounting rules have a practice of frequently ignoring time value benefits. Thus, a publicly traded company generally gets no earnings boost whatsoever from parking its earnings in a tax haven, given that the U.S. tax will be counted in full as if payable today. But - if you say that particular earnings are permanently reinvested abroad, and if your accountants believe you, then you can treat the deferred taxes on those earnings as worth zero, and hence as not requiring any reduction of your pre-tax earnings by reason of U.S. international income taxation.
Publicly traded companies tend to love this. Indeed, it's a key reason why they are so reluctant to repatriate foreign earnings, even if they could use the cash in the U.S. It would result in a negative accounting hit if done with "permanently reinvested" earnings (PRE), and what's more might lead their accountants to question more rigorously whether they should accept the PRE label for other money that remains abroad.
OK, that's enough windup, on to the pitch concerning Apple. The fun thing about the MSNBC article that I linked above is that it shows Apple to be doing the opposite. Apple has billions of dollars in profits parked in tax havens, which a knowledgeable individual (although he has no association with Apple) recently told me that he believes they will NEVER bring home to the U.S. if it costs U.S. tax. But they have declined to seek the PRE label. So their reported earnings are billions of dollars too low, compared to the likely reality.
They do this, apparently, so that they will look like good corporate citizens. After all, if you look at their financial statements, it shows them paying substantial U.S. taxes that they are not actually paying, given the current deferral and the fact that it may end up being permanent.
In the meantime, they are lobbying for the enactment of an exemption system that, if done without the transition hit, would give them a positive reported earnings shock of many billions of dollars, in addition to giving them full U.S. access to the overseas funds without a tax hit.
Under-reporting earnings, in order to over-report U.S. taxes paid and look like a good citizen, accompanied with the political aim of getting those taxes eliminated - that is unusual. No wonder that those guys are also smart enough to keep on making products that people such as me are eager to buy. (I am waiting for the new iPhone 5, as my prehistoric 3 is limping along pretty feebly at this point.)
The usual story, of course, is that U.S. multinationals defer U.S. tax by playing tax planning and reporting games to locate the income in tax havens. But for publicly traded companies, there's a problem. In theory, they will eventually have to pay the tax upon repatriating the earnings to the U.S.
What is more, if this is certain to happen and the U.S. repatriation tax rate will always be the same, they actually don't reduce the present value of the tax liability by deferring the repatriation. This is what the "new view" of dividend repatriations tell us - and it is a mathematically provable tautology under its assumptions. It does not, of course, refute the point that it's better to have further earnings on the earnings accrue in a low-tax foreign environment than in the higher-tax domestic one, but that's a separate issue. And the new view conclusion does not apply if one will never have to repatriate the funds, or if the future repatriation tax rate will be lower than the present one (e.g., in the case where it is zero, due to the adoption of a territorial tax system without transition features that result in collecting deferred taxes to date).
Anyway, back to the accounting bit. Even though it is often plausible to think that repatriation is in fact greatly reducing the expected negative value (if any) of the deferred tax, accounting rules have a practice of frequently ignoring time value benefits. Thus, a publicly traded company generally gets no earnings boost whatsoever from parking its earnings in a tax haven, given that the U.S. tax will be counted in full as if payable today. But - if you say that particular earnings are permanently reinvested abroad, and if your accountants believe you, then you can treat the deferred taxes on those earnings as worth zero, and hence as not requiring any reduction of your pre-tax earnings by reason of U.S. international income taxation.
Publicly traded companies tend to love this. Indeed, it's a key reason why they are so reluctant to repatriate foreign earnings, even if they could use the cash in the U.S. It would result in a negative accounting hit if done with "permanently reinvested" earnings (PRE), and what's more might lead their accountants to question more rigorously whether they should accept the PRE label for other money that remains abroad.
OK, that's enough windup, on to the pitch concerning Apple. The fun thing about the MSNBC article that I linked above is that it shows Apple to be doing the opposite. Apple has billions of dollars in profits parked in tax havens, which a knowledgeable individual (although he has no association with Apple) recently told me that he believes they will NEVER bring home to the U.S. if it costs U.S. tax. But they have declined to seek the PRE label. So their reported earnings are billions of dollars too low, compared to the likely reality.
They do this, apparently, so that they will look like good corporate citizens. After all, if you look at their financial statements, it shows them paying substantial U.S. taxes that they are not actually paying, given the current deferral and the fact that it may end up being permanent.
In the meantime, they are lobbying for the enactment of an exemption system that, if done without the transition hit, would give them a positive reported earnings shock of many billions of dollars, in addition to giving them full U.S. access to the overseas funds without a tax hit.
Under-reporting earnings, in order to over-report U.S. taxes paid and look like a good citizen, accompanied with the political aim of getting those taxes eliminated - that is unusual. No wonder that those guys are also smart enough to keep on making products that people such as me are eager to buy. (I am waiting for the new iPhone 5, as my prehistoric 3 is limping along pretty feebly at this point.)
Appearance today on Mike Huckabee's radio show
I am scheduled to speak with Governor Mike Huckabee on his radio show today, at 12:32 EST, for up to fifteen minutes. The show is carried nationwide on Cumulus Media Networks, and a link to it is available here.
The topic will be tax havens for the super-rich, with particular reference to the recently issued report by the Tax Justice Network suggesting that $21 trillion to $32 trillion of unreported private financial wealth from around the world is parked in tax havens.
UPDATE: That was fun. I found Huckabee quite engaging and open-minded to talk with. He even let me make a few points that I am always glad to get to communicate to larger audiences. (As talk show hosts go, definitely a listener rather than a ranter.) One is that progressivity and the choice of tax base (income vs. consumption) are different issues. He mentioned the FAIR tax, and said he likes it but maybe I don't. I replied that I have two objections to it, one being its use of a retail sales tax rather than a VAT methodology to implement consumption taxation, which I called really the same thing except that the VAT is easier to enforce, and the other being the rate structure. Then he asked a follow-up and I was able to briefly describe the consumed income tax and the David Bradford X-tax (modifying the flat tax) as available progressive consumption tax vehicles. Romney came up very briefly at the end, but was by no means the focus.
FURTHER UPDATE: You can download the soundfile here.
The topic will be tax havens for the super-rich, with particular reference to the recently issued report by the Tax Justice Network suggesting that $21 trillion to $32 trillion of unreported private financial wealth from around the world is parked in tax havens.
UPDATE: That was fun. I found Huckabee quite engaging and open-minded to talk with. He even let me make a few points that I am always glad to get to communicate to larger audiences. (As talk show hosts go, definitely a listener rather than a ranter.) One is that progressivity and the choice of tax base (income vs. consumption) are different issues. He mentioned the FAIR tax, and said he likes it but maybe I don't. I replied that I have two objections to it, one being its use of a retail sales tax rather than a VAT methodology to implement consumption taxation, which I called really the same thing except that the VAT is easier to enforce, and the other being the rate structure. Then he asked a follow-up and I was able to briefly describe the consumed income tax and the David Bradford X-tax (modifying the flat tax) as available progressive consumption tax vehicles. Romney came up very briefly at the end, but was by no means the focus.
FURTHER UPDATE: You can download the soundfile here.
More possibilities re. the Swiss bank account
Brian Beutler at Talking Points Memo reports on some speculation that I offered regarding the Swiss bank account, and in particular the possibility that Romney may have needed to participate in the IRS amnesty program (which has more recently been denied, but hadn't been addressed yet when we spoke):
"Theory #2: Romney and his financial advisers lost track of the Swiss account.
"I know that sounds implausible but stay with me here....
"Daniel Shaviro ... floats this theory: What if Romney’s ... money managers simply overlooked the trivial interest he earned on this account until the federal government came knocking at UBS’ door.
“'Obviously, no one would use a Swiss bank account primarily in order to avoid U.S. tax on one’s interest income, at so low a rate of return,' Shaviro told me. 'You might have a case where the tax guys in his operation weren’t consulted on the Swiss bank account, since it wasn’t done for tax reasons, and didn’t learn about or at least prioritize it.'
“'[H]e was earning relatively trivial interest from the account. … This suggests to me that the interest may have been a side issue, and not have gotten the serious attention that he and his people no doubt gave to the [Individual Retirement Account], the Caymans entities, etcetera,' Shaviro speculates.
"Whatever Romney’s investment team may or may not have been telling his tax team, presumably at some point his political team got wind of the Swiss bank account and recognized how damaging it could be to his presidential ambitions. But because Romney has refused to release more information about his finances, answers to questions about his wealth, and particularly about this one account, are black boxed. That’s left him vulnerable to a slow drip of dark-toned speculation from his political enemies. As the experts I’ve spoken to suggest, there could be less nefarious explanations that place Romney on the right side of the law — but still expose to public scrutiny the tax avoidance schemes Romney used and that are only available to the very wealthiest Americans."
"Theory #2: Romney and his financial advisers lost track of the Swiss account.
"I know that sounds implausible but stay with me here....
"Daniel Shaviro ... floats this theory: What if Romney’s ... money managers simply overlooked the trivial interest he earned on this account until the federal government came knocking at UBS’ door.
“'Obviously, no one would use a Swiss bank account primarily in order to avoid U.S. tax on one’s interest income, at so low a rate of return,' Shaviro told me. 'You might have a case where the tax guys in his operation weren’t consulted on the Swiss bank account, since it wasn’t done for tax reasons, and didn’t learn about or at least prioritize it.'
“'[H]e was earning relatively trivial interest from the account. … This suggests to me that the interest may have been a side issue, and not have gotten the serious attention that he and his people no doubt gave to the [Individual Retirement Account], the Caymans entities, etcetera,' Shaviro speculates.
"Whatever Romney’s investment team may or may not have been telling his tax team, presumably at some point his political team got wind of the Swiss bank account and recognized how damaging it could be to his presidential ambitions. But because Romney has refused to release more information about his finances, answers to questions about his wealth, and particularly about this one account, are black boxed. That’s left him vulnerable to a slow drip of dark-toned speculation from his political enemies. As the experts I’ve spoken to suggest, there could be less nefarious explanations that place Romney on the right side of the law — but still expose to public scrutiny the tax avoidance schemes Romney used and that are only available to the very wealthiest Americans."
Monday, July 23, 2012
First mention for a while
"Young D.C. lawyer Bill Doberman, who fancies himself the James Bond of
the Potomac. is a liar, a conniver, a phony, a hypocrite, and a cad -
and those are his good points. But will they be enough to win him the
much desired booby prize of partnership at Ashby & Cinders?
"He will need all his skills to out-compete the dour Lowell Stellworth, languid yet fanatical master of the lengthy footnote, while also dodging hostile senior partners, posing as an arts connoisseur, and keeping his two girlfriends at the firm from finding out about each other. All this in the hope of qualifying at the end for even longer hours and a pay cut."
... From the description of my novel Getting It, which seems to have registered a Kindle sale yesterday. Act now while virtual supplies last. It only costs $3.99 on Kindle, and has received a number of highly favorable or even rave reviews, if I do say so myself, such as here, here, here, here, and here.
"He will need all his skills to out-compete the dour Lowell Stellworth, languid yet fanatical master of the lengthy footnote, while also dodging hostile senior partners, posing as an arts connoisseur, and keeping his two girlfriends at the firm from finding out about each other. All this in the hope of qualifying at the end for even longer hours and a pay cut."
... From the description of my novel Getting It, which seems to have registered a Kindle sale yesterday. Act now while virtual supplies last. It only costs $3.99 on Kindle, and has received a number of highly favorable or even rave reviews, if I do say so myself, such as here, here, here, here, and here.
Speak of wasteful government spending ...
According to this GAO report, last year's delay in raising the Federal debt limit, by reason of Congressional brinkmanship, "led to an increase in the Treasury's borrowing costs of $1.3 billion in fiscal year 2011," and will continue to cost us money in the future.
This was not even a transfer (to the U.S. and foreign investors who would have been paid less interest otherwise) - it was purely waste, since the investors were merely being compensated for uncertainty about whether and when they'd be paid.
This was not even a transfer (to the U.S. and foreign investors who would have been paid less interest otherwise) - it was purely waste, since the investors were merely being compensated for uncertainty about whether and when they'd be paid.
Friday, July 20, 2012
2010 Romney tax return story
Interesting story today by Ryan Grim and Zach Carter at the Huffington Post. They report that, in 2010, "Mitt Romney saved himself hundreds of thousands of dollars in taxes in 2010 by transferring stock in two companies from his personal account to a nonprofit entity he set up. The stock maneuver included $172,397 in shares of Sensata Technologies, a company now under fire for a high-profile effort to offshore central Illinois jobs to China ....
"Romney had received the Sensata stock as part of a Bain payout; he listed no cost for it on his tax return. By transferring that stock to his nonprofit Tyler Charitable Foundation, he avoided roughly $25,000 in capital gains taxes he would have owed. He also shaved an additional $50,000 off his tax bill by deducting the charitable contribution from his income....
"Romney also transferred about $1.3 million worth of stock in Domino's Pizza to his nonprofit, which shaved about $600,000 off his tax bill. He reported paying nothing for the pizza shares, having acquired them as part of Bain's takeover of the company."
Let's leave the offshoring to one side, as I accept that the shifting around of global capital both is hard to fight and in the long run (at least, with appropriate safety net policies at home) is generally net-beneficial to all countries. There are several interesting tax angles here, if I correctly understand what Grim and Carter have found.
The main tax advantages to Romney that the article points to are as follows. First, there is a very poorly conceived rule for charitable contributions, under which you get to deduct the full value of a gift of appreciated property even though you have never paid tax on the appreciation. Thus, if I get invited to participate in some great IPO, and buy a share of stock for $1, then I give it to a charity when its value has increased to $1 million, I get to deduct the full $1 million even though I never paid tax on the appreciation and am only out of pocket $1. The only plausible rationale for this rule - that we want to encourage charitable contributions by allowing more than the out-of-pocket cost to be deducted - would apply equally to cash gifts.
The fact that Romney took advantage of this rule is fair game for commentary, insofar as it helps expose how the tax system works for very rich people, but it is certainly plain vanilla tax planning that no one would complain about as such.
The other rule he seems to have taken advantage of pertains to charitable foundations. Here the complaint is that he got a deduction today for stock that he may still have been effectively controlling, via any influence he could wield regarding who would end up getting the use of the donation. On the other hand, he had, presumably, irrevocably committed the value to charitable, rather than personal, use. Once again, I wouldn't regard this as unduly aggressive tax planning by Romney (and I could certainly see doing it myself if I were in his economic position), but it does give us a window on the opportunities that very wealthy people have for fun and games under the existing tax code.
By the way, he wouldn't have faced capital gains tax just because he held stock that was worth more than its basis, unless he would otherwise have sold it for a profit. So if the alternative to the Sensata gift was keeping it in his portfolio, the actual transaction didn't enable him to avoid capital gains tax that he would otherwise have paid.
What I find most mysterious about the story - and which connects to the mystery of the $20 million to $100 million in his IRA - is the assertion, which I assume comes straight from attachments to the 2010 return, that the Sensata and Domino's stock had a zero basis to Romney. That I find quite strange. If he got Sensata stock for free as part of a Bain payout, its value at the time of the transfer should have been included in his taxable income. Then it would have had a cost basis equal to that value. The charitable deduction would have been the same (since it depends on value, not basis), but his taxable income for the year when he got the stock (including if it was 2010) would have been higher. How credible is it that the stock was actually worth zero when he got it? Would have sold it to you or me for zero?
Similar question for the Domino's stock. If he acquired it via a tax-free reorganization, it would presumably have a carryover basis (i.e., the same basis it had in the hands of the prior owners). Was that zero? But suppose that Bain initially held the Domino's stock with a zero basis (or indeed with any other basis). If it transferred the stock to Romney as part of a compensatory payout, then the same analysis as that for the Sensata stock, based on value at the time of the transfer, would apply.
In sum, we have two tax planning details - pertaining to charitable gifts of appreciated property and to the rules for charitable foundations - that were clearly permissible tax planning, although they do shed light both on the state of the law and on Romney's willingness to use it to personal advantage (in ways that I freely admit I would do, too, in his position).
But the zero basis listed for the Sensata and Domino's stock strikes me as more mysterious, and as raising the questions of whether (a) he under-reported taxable income upon receiving the stock, and (b) he had a general practice of unduly low-balling the value of high-upside stock when this was tax-beneficial to him.
"Romney had received the Sensata stock as part of a Bain payout; he listed no cost for it on his tax return. By transferring that stock to his nonprofit Tyler Charitable Foundation, he avoided roughly $25,000 in capital gains taxes he would have owed. He also shaved an additional $50,000 off his tax bill by deducting the charitable contribution from his income....
"Romney also transferred about $1.3 million worth of stock in Domino's Pizza to his nonprofit, which shaved about $600,000 off his tax bill. He reported paying nothing for the pizza shares, having acquired them as part of Bain's takeover of the company."
Let's leave the offshoring to one side, as I accept that the shifting around of global capital both is hard to fight and in the long run (at least, with appropriate safety net policies at home) is generally net-beneficial to all countries. There are several interesting tax angles here, if I correctly understand what Grim and Carter have found.
The main tax advantages to Romney that the article points to are as follows. First, there is a very poorly conceived rule for charitable contributions, under which you get to deduct the full value of a gift of appreciated property even though you have never paid tax on the appreciation. Thus, if I get invited to participate in some great IPO, and buy a share of stock for $1, then I give it to a charity when its value has increased to $1 million, I get to deduct the full $1 million even though I never paid tax on the appreciation and am only out of pocket $1. The only plausible rationale for this rule - that we want to encourage charitable contributions by allowing more than the out-of-pocket cost to be deducted - would apply equally to cash gifts.
The fact that Romney took advantage of this rule is fair game for commentary, insofar as it helps expose how the tax system works for very rich people, but it is certainly plain vanilla tax planning that no one would complain about as such.
The other rule he seems to have taken advantage of pertains to charitable foundations. Here the complaint is that he got a deduction today for stock that he may still have been effectively controlling, via any influence he could wield regarding who would end up getting the use of the donation. On the other hand, he had, presumably, irrevocably committed the value to charitable, rather than personal, use. Once again, I wouldn't regard this as unduly aggressive tax planning by Romney (and I could certainly see doing it myself if I were in his economic position), but it does give us a window on the opportunities that very wealthy people have for fun and games under the existing tax code.
By the way, he wouldn't have faced capital gains tax just because he held stock that was worth more than its basis, unless he would otherwise have sold it for a profit. So if the alternative to the Sensata gift was keeping it in his portfolio, the actual transaction didn't enable him to avoid capital gains tax that he would otherwise have paid.
What I find most mysterious about the story - and which connects to the mystery of the $20 million to $100 million in his IRA - is the assertion, which I assume comes straight from attachments to the 2010 return, that the Sensata and Domino's stock had a zero basis to Romney. That I find quite strange. If he got Sensata stock for free as part of a Bain payout, its value at the time of the transfer should have been included in his taxable income. Then it would have had a cost basis equal to that value. The charitable deduction would have been the same (since it depends on value, not basis), but his taxable income for the year when he got the stock (including if it was 2010) would have been higher. How credible is it that the stock was actually worth zero when he got it? Would have sold it to you or me for zero?
Similar question for the Domino's stock. If he acquired it via a tax-free reorganization, it would presumably have a carryover basis (i.e., the same basis it had in the hands of the prior owners). Was that zero? But suppose that Bain initially held the Domino's stock with a zero basis (or indeed with any other basis). If it transferred the stock to Romney as part of a compensatory payout, then the same analysis as that for the Sensata stock, based on value at the time of the transfer, would apply.
In sum, we have two tax planning details - pertaining to charitable gifts of appreciated property and to the rules for charitable foundations - that were clearly permissible tax planning, although they do shed light both on the state of the law and on Romney's willingness to use it to personal advantage (in ways that I freely admit I would do, too, in his position).
But the zero basis listed for the Sensata and Domino's stock strikes me as more mysterious, and as raising the questions of whether (a) he under-reported taxable income upon receiving the stock, and (b) he had a general practice of unduly low-balling the value of high-upside stock when this was tax-beneficial to him.
Thursday, July 19, 2012
Double standard
Suppose that Romney was interviewing people for an important job. The person who got the job would get to exercise enormous independent discretion, and his or her character and values would therefore matter a lot.
Now suppose that a job applicant simply flat out refused to let Romney see highly relevant personal and business history information that would have shed considerable light on his or her character and values. Do you think that person would get the job?
UPDATE: As noted by a commenter on this blog entry, it would certainly be interesting to learn how many past years' tax returns Romeny requests from people he is considering for the vice presidential nomination.
Now suppose that a job applicant simply flat out refused to let Romney see highly relevant personal and business history information that would have shed considerable light on his or her character and values. Do you think that person would get the job?
UPDATE: As noted by a commenter on this blog entry, it would certainly be interesting to learn how many past years' tax returns Romeny requests from people he is considering for the vice presidential nomination.
Wednesday, July 18, 2012
More on the mystery of the Swiss bank account
At the Huffington Post, Zach Carter and Ryan Grimm quote the manager of a Romney blind trust as saying that the infamous Swiss bank account was worth about $3 million and generated roughly $1,700 in interest. (I presume this is an annual return.)
Not much of a pretax return there, unless you happen to think that 0.023% sounds good. Indeed, it's so low that even improperly excluding the interest income from U.S. tax (and thus perhaps needing to participate in the 2009 amnesty program) presumably would have been more of a careless oversight than anything calculated.
But this still leaves us with the question of why Romney had the account, given the outright silliness of the manager's claim that it was set up for "diversification" - which, as Carter and Grimm explain, "puzzles tax and investment experts, who note that all of the investment options available in Switzerland are available in American accounts."
Well, duh, it was obviously about the secrecy, though regarding what, and for what ends, remains unknown.
But given that this story is not just about taxes per se - it's about evaluating both Romney as an individual who wants to be our president, and the aspects of the existing tax and financial system that he has come to epitomize - I would certainly second the article's call for disclosure of the relevant Report on Foreign Bank and Financial Accounts, or FBAR, that he must have filed.
... Although, I must admit that I am not holding my breath.
Not much of a pretax return there, unless you happen to think that 0.023% sounds good. Indeed, it's so low that even improperly excluding the interest income from U.S. tax (and thus perhaps needing to participate in the 2009 amnesty program) presumably would have been more of a careless oversight than anything calculated.
But this still leaves us with the question of why Romney had the account, given the outright silliness of the manager's claim that it was set up for "diversification" - which, as Carter and Grimm explain, "puzzles tax and investment experts, who note that all of the investment options available in Switzerland are available in American accounts."
Well, duh, it was obviously about the secrecy, though regarding what, and for what ends, remains unknown.
But given that this story is not just about taxes per se - it's about evaluating both Romney as an individual who wants to be our president, and the aspects of the existing tax and financial system that he has come to epitomize - I would certainly second the article's call for disclosure of the relevant Report on Foreign Bank and Financial Accounts, or FBAR, that he must have filed.
... Although, I must admit that I am not holding my breath.
Tuesday, July 17, 2012
Book club
I've just finished reading a brilliant, quiet, but in its way brutal and chilling novel, Thomas A. Savage's "The Power of the Dog."
Sometimes info on Amazon serves you better than leafing through the items in a bricks-and-mortar bookstore. (I've always found that I'd need to read for a bit longer than I realistically have, in order to decide whether I like an item or not.) In this case, what put me onto it was seeing on the website that Savage had said his favorite novel was "Mrs. Bridge," by Evan Connell. That novel, too, though in an entirely different way, is quiet yet in its way brutal and chilling. Both are startlingly and yet unobtrusively well-written.
Obviously, both very highly recommended.
Sometimes info on Amazon serves you better than leafing through the items in a bricks-and-mortar bookstore. (I've always found that I'd need to read for a bit longer than I realistically have, in order to decide whether I like an item or not.) In this case, what put me onto it was seeing on the website that Savage had said his favorite novel was "Mrs. Bridge," by Evan Connell. That novel, too, though in an entirely different way, is quiet yet in its way brutal and chilling. Both are startlingly and yet unobtrusively well-written.
Obviously, both very highly recommended.
Could Romney have paid zero U.S. income taxes in 2009?
I've been getting the question in the title to this post, and no one can really answer it without seeing the return itself. But let's take another look at the 2010 return, and see what we can glean from that.
In 2010, Romney paid just over $3 million of tax on $21.6 million of adjusted gross income. Hence, the widely quoted 13.9%. tax rate, which is simply $3M divided by $21.6M.
The main components of the $21.6M were as follows:
(1) About $12.6 million of net capital gain, the great majority of it long-term capital gain (including carried interest payments from Bain) that gets taxed at 15 percent. However, the gross amount of Romney's 2010 capital gains was almost $5 million higher than this. He reduced the net inclusion by deducting $4.8 million of capital loss carryovers from 2009. (If one ignored this deduction and recomputed his 2010 effective rate, it would be $3M / $26.4M , or about 11.4%. See below for discussion relevant to whether one should so recompute it.)
(2) About $3.3 million in interest income, plus $4.9 million in dividends, plus just under $600,000 in Schedule C business income, mainly for speaking fees. So his "ordinary" income (including that which qualified for the 15% tax rate on dividends) totaled about $8.8M, yielding the $21.6M total once one throws in miscellaneous odds and ends.
Okay, let's run the tape in reverse and see what we can figure out about 2009. The gross capital gain may have been significantly higher in 2009 than in 2010, because he was still receiving other payouts from Bain that I would think could have been structured to yield capital gain. [UPDATE: This may be incorrect - the arrangement appears to have been that he'd receive payouts on Bain deals that occurred through 2009, not that he'd receive payouts until 2009 on Bain deals. So perhaps we might expect the gross capital gain for 2009 to be similar to those in 2010, or perhaps lower given overall economic circumstances, rather than higher.)
In any event, we know from the capital loss carryover in the 2010 return that his net capital gain inclusion for 2009 was zero (or more specifically he was allowed to deduct a net capital loss of $3,000). As I've noted in earlier posts, this presumably reflected loss harvesting - the sale of "loss stocks" that presumably had gone down in the 2008-9 stock market collapse, although he may still have retained in his portfolio lots of still-appreciated stocks that he had bought years earlier when the stock market was significantly lower.
OK, so if we are asking what his effective tax rate was in 2009 (the analogy to the widely accepted 13.9% figure for 2010), even if we had the return, this question wouldn't answer itself. We would have to ask ourselves: What is the denominator (i.e., income for the year). Do we want to say zero, despite the gross, as opposed to net, capital gains? Obviously income is a net, not a gross, concept, and the stocks that he sold presumably did really lose value. But with loss harvesting you have to think about the overall portfolio and how it was performing over a longer period of time. (His tax return wouldn't show that, of course.)
So far, this sounds like a scenario that Romney could defend if he released the 2009 return. He has no net capital gain, pays no tax on it, says that this is legitimate because he had stock market losses, and the riposte that he may have used loss harvesting to report losses against a background of overall stock appreciation over a period of years is a bit too refined to do him much political harm.
But could he have paid zero overall in 2009? This would have required zeroing out the ordinary income, which can't be offset by capital losses. Again, in 2010 all this other income added up to about $8.8M. His reluctance to release his 2009 return would suddenly be a lot more understandable if it turned out that he had questionable tax shelter losses offsetting the 2009 equivalent of this income. We have absolutely no direct evidence that he did anything like this. What's more, it would have been irrational for him to engage in this stuff in between presidential runs, and one wouldn't think he'd be irrational. But again, the mystery of his reluctance to release anything further openly invites otherwise unfounded speculation.
In 2010, Romney paid just over $3 million of tax on $21.6 million of adjusted gross income. Hence, the widely quoted 13.9%. tax rate, which is simply $3M divided by $21.6M.
The main components of the $21.6M were as follows:
(1) About $12.6 million of net capital gain, the great majority of it long-term capital gain (including carried interest payments from Bain) that gets taxed at 15 percent. However, the gross amount of Romney's 2010 capital gains was almost $5 million higher than this. He reduced the net inclusion by deducting $4.8 million of capital loss carryovers from 2009. (If one ignored this deduction and recomputed his 2010 effective rate, it would be $3M / $26.4M , or about 11.4%. See below for discussion relevant to whether one should so recompute it.)
(2) About $3.3 million in interest income, plus $4.9 million in dividends, plus just under $600,000 in Schedule C business income, mainly for speaking fees. So his "ordinary" income (including that which qualified for the 15% tax rate on dividends) totaled about $8.8M, yielding the $21.6M total once one throws in miscellaneous odds and ends.
Okay, let's run the tape in reverse and see what we can figure out about 2009. The gross capital gain may have been significantly higher in 2009 than in 2010, because he was still receiving other payouts from Bain that I would think could have been structured to yield capital gain. [UPDATE: This may be incorrect - the arrangement appears to have been that he'd receive payouts on Bain deals that occurred through 2009, not that he'd receive payouts until 2009 on Bain deals. So perhaps we might expect the gross capital gain for 2009 to be similar to those in 2010, or perhaps lower given overall economic circumstances, rather than higher.)
In any event, we know from the capital loss carryover in the 2010 return that his net capital gain inclusion for 2009 was zero (or more specifically he was allowed to deduct a net capital loss of $3,000). As I've noted in earlier posts, this presumably reflected loss harvesting - the sale of "loss stocks" that presumably had gone down in the 2008-9 stock market collapse, although he may still have retained in his portfolio lots of still-appreciated stocks that he had bought years earlier when the stock market was significantly lower.
OK, so if we are asking what his effective tax rate was in 2009 (the analogy to the widely accepted 13.9% figure for 2010), even if we had the return, this question wouldn't answer itself. We would have to ask ourselves: What is the denominator (i.e., income for the year). Do we want to say zero, despite the gross, as opposed to net, capital gains? Obviously income is a net, not a gross, concept, and the stocks that he sold presumably did really lose value. But with loss harvesting you have to think about the overall portfolio and how it was performing over a longer period of time. (His tax return wouldn't show that, of course.)
So far, this sounds like a scenario that Romney could defend if he released the 2009 return. He has no net capital gain, pays no tax on it, says that this is legitimate because he had stock market losses, and the riposte that he may have used loss harvesting to report losses against a background of overall stock appreciation over a period of years is a bit too refined to do him much political harm.
But could he have paid zero overall in 2009? This would have required zeroing out the ordinary income, which can't be offset by capital losses. Again, in 2010 all this other income added up to about $8.8M. His reluctance to release his 2009 return would suddenly be a lot more understandable if it turned out that he had questionable tax shelter losses offsetting the 2009 equivalent of this income. We have absolutely no direct evidence that he did anything like this. What's more, it would have been irrational for him to engage in this stuff in between presidential runs, and one wouldn't think he'd be irrational. But again, the mystery of his reluctance to release anything further openly invites otherwise unfounded speculation.
The presidential campaigns debate international tax policy
I was bemused to see in today's Times that Obama and Romney spent some time yesterday debating a Tax Notes article on U.S. international taxation published by Kim Clausing. She and I recently co-authored an article in the Tax Law Review, and the likes of us are usual toiling far from the harsh glare of an active presidential campaign.
Clausing's article is available as published, though perhaps just for Tax Analysts subscribers, here. If that link doesn't work for you, a working paper version is publicly available here. It makes three main points. First, while there is lots of talk in the U.S. about shifting to a territorial system, under which U.S. companies' foreign source active business income would be exempted from U.S. tax, it makes a lot of difference how one goes about doing this. Many of our peer countries that have shifted to territorial or exemption systems have kept a lot of features in their rules that address efforts by resident multinationals to shift either reported taxable income or the actual locus of investment from the home country to tax havens.
Second, she estimates that, if the U.S. shifted to a pure territorial system without similar features, the U.S. companies would shift their activities in such a manner as to increase employment in low-tax countries by about 800,000 jobs. This is based on empirical estimates regarding various relevant parameters, from her own work and that of other leading empirical researchers in the international tax policy realm.
Third, under normal macroeconomic circumstances, it is plausible, notwithstanding all the recent campaign talk about outsourcing, that this would not result in any net U.S. job loss (although it is possible that lower-wage jobs would replace higher-wage jobs). In a full employment scenario, U.S. employment would merely be reallocated, and indeed there is research suggesting that cheap labor abroad can actually be a complement to particular U.S. jobs. But in the current state of our economy, steeped as it is in a deep recession (whether it meets the official statistical definition or not), with persistent high unemployment and inadequate overall demand, the scenario in which lost jobs here do not end up being replaced any time soon is unfortunately all too plausible.
Against this background, Obama had some fun saying that Romney would create jobs all right, only they wouldn't be created here. Romney's campaign didn't respond directly, but Republicans who spoke to the Times authors made a couple of main assertions. First, they argued political bias. But Clausing is a well-respected researcher - listed, for example, by the International Tax Policy Forum (ITPF) as one of the authors whose research it supports. The ITPF is a respected nonpartisan research organization, but one that is funded by leading U.S. multinationals and definitely could be viewed as lining up on that side of the debate.
Second, the pro-Romney sources noted that territoriality has been favored by Obama advisors as well as by the Bowles-Simpson panel. True enough, but again the key question, if you shift to a territorial system, is exactly how you do it and when.
These are topics that I am writing about right now (and indeed almost literally so, since the moment I finish this post I will be opening my docx file for chapter 4 of my book in progress on international tax policy). So I will have a lot more to say about these issues in the right time and place, but perhaps not right here and now, as there is no simple rifleshot takeaway that would do justice to the entire subject.
Clausing's article is available as published, though perhaps just for Tax Analysts subscribers, here. If that link doesn't work for you, a working paper version is publicly available here. It makes three main points. First, while there is lots of talk in the U.S. about shifting to a territorial system, under which U.S. companies' foreign source active business income would be exempted from U.S. tax, it makes a lot of difference how one goes about doing this. Many of our peer countries that have shifted to territorial or exemption systems have kept a lot of features in their rules that address efforts by resident multinationals to shift either reported taxable income or the actual locus of investment from the home country to tax havens.
Second, she estimates that, if the U.S. shifted to a pure territorial system without similar features, the U.S. companies would shift their activities in such a manner as to increase employment in low-tax countries by about 800,000 jobs. This is based on empirical estimates regarding various relevant parameters, from her own work and that of other leading empirical researchers in the international tax policy realm.
Third, under normal macroeconomic circumstances, it is plausible, notwithstanding all the recent campaign talk about outsourcing, that this would not result in any net U.S. job loss (although it is possible that lower-wage jobs would replace higher-wage jobs). In a full employment scenario, U.S. employment would merely be reallocated, and indeed there is research suggesting that cheap labor abroad can actually be a complement to particular U.S. jobs. But in the current state of our economy, steeped as it is in a deep recession (whether it meets the official statistical definition or not), with persistent high unemployment and inadequate overall demand, the scenario in which lost jobs here do not end up being replaced any time soon is unfortunately all too plausible.
Against this background, Obama had some fun saying that Romney would create jobs all right, only they wouldn't be created here. Romney's campaign didn't respond directly, but Republicans who spoke to the Times authors made a couple of main assertions. First, they argued political bias. But Clausing is a well-respected researcher - listed, for example, by the International Tax Policy Forum (ITPF) as one of the authors whose research it supports. The ITPF is a respected nonpartisan research organization, but one that is funded by leading U.S. multinationals and definitely could be viewed as lining up on that side of the debate.
Second, the pro-Romney sources noted that territoriality has been favored by Obama advisors as well as by the Bowles-Simpson panel. True enough, but again the key question, if you shift to a territorial system, is exactly how you do it and when.
These are topics that I am writing about right now (and indeed almost literally so, since the moment I finish this post I will be opening my docx file for chapter 4 of my book in progress on international tax policy). So I will have a lot more to say about these issues in the right time and place, but perhaps not right here and now, as there is no simple rifleshot takeaway that would do justice to the entire subject.
Monday, July 16, 2012
Rigged financial markets?
This story about big hedge funds getting an advance peek at new information relevant to stock price movements, plus the LIBOR manipulation scandal, really make one wonder about the degree to which financial markets and high-end financial returns are serving the purposes that they are supposed to in a well-functioning market economy.
Why won't Romney release his 2009 tax return?
Increasingly, everyone (including Republicans such as George Will, Matthew Dowd, and William Kristol) agrees that the reason for Romney's reluctance to release any pre-2010 tax return might be that what it would show is worse than all the heat he is taking for non-disclosure.
But what could that be? Well, I certainly don't know either, but here are some salient points:
1) We know from the 2010 tax return, in which he had a net capital loss carryforward from 2009, that he zeroed out his net capital gains - including from carried interest Bain income - in 2009.
2) 2009 was the last year in which he received certain Bain payments as the playout of his "retroactive retirement."
3) It's been hard to understand what benefit he thought he was getting from the Swiss bank account, and there was an IRS amnesty program in 2009 for fraudulent nondisclosure of offshore income. If he had to come clean in 2009, this might be embarrassing, especially given that there was an iron fist inside the IRS leniency offer (i.e., if you held out, they might get you without any amnesty).
From the first two items above, it may be a reasonable guess that Romney had a lot more gross income in 2009 than 2010 and 2011, yet paid less tax or even zero tax.
This might have had to involve, not just zeroing out capital gains via "loss harvesting" in response to the down 2009 stock market. but also creating tax shelter losses to offset ordinary income.
We know from attachments to the 2010 return that some of his "blind trusts" were engaged in transactions identified by the IRS in Notice 2002-35, which pertains to fake loss-generating scams that involved abusing and misinterpreting the notional principal contract regulations. So far as the blind trust aspect of that is concerned, note that Romney himself once called blind trusts an "age-old ruse." But I am unclear about how much to make of the 2010 disclosure, given that it would have undermined expecting to get the tax benefits if the deals at issue were complete scams. So it has struck me as conceivable that the blind trusts did something in the ballpark of required 2002-35 disclosure but less extreme and more legally defensible.
Still, willingness to do extremely aggressive tax sheltering (such as through loss generation from circular flows of cash) in 2009 would not come as a huge surprise, even though it seems like a dumb idea if you are preparing to run for president again. I wonder if the very fact that he was running for president might have led him to figure that he was audit-proof, on the ground that the IRS would look too political if it started challenging things.
I'm not sure how much credence to give this, but a Huffington Post commentator claims that, "according to people close to the situation, Romney would drop out of the presidential race before ever releasing further tax returns." That certainly sounds dire, and a huge 2009 gross income plus huge claimed losses, perhaps even topped off by amnesty income reports, would be one way of getting there.
But what could that be? Well, I certainly don't know either, but here are some salient points:
1) We know from the 2010 tax return, in which he had a net capital loss carryforward from 2009, that he zeroed out his net capital gains - including from carried interest Bain income - in 2009.
2) 2009 was the last year in which he received certain Bain payments as the playout of his "retroactive retirement."
3) It's been hard to understand what benefit he thought he was getting from the Swiss bank account, and there was an IRS amnesty program in 2009 for fraudulent nondisclosure of offshore income. If he had to come clean in 2009, this might be embarrassing, especially given that there was an iron fist inside the IRS leniency offer (i.e., if you held out, they might get you without any amnesty).
From the first two items above, it may be a reasonable guess that Romney had a lot more gross income in 2009 than 2010 and 2011, yet paid less tax or even zero tax.
This might have had to involve, not just zeroing out capital gains via "loss harvesting" in response to the down 2009 stock market. but also creating tax shelter losses to offset ordinary income.
We know from attachments to the 2010 return that some of his "blind trusts" were engaged in transactions identified by the IRS in Notice 2002-35, which pertains to fake loss-generating scams that involved abusing and misinterpreting the notional principal contract regulations. So far as the blind trust aspect of that is concerned, note that Romney himself once called blind trusts an "age-old ruse." But I am unclear about how much to make of the 2010 disclosure, given that it would have undermined expecting to get the tax benefits if the deals at issue were complete scams. So it has struck me as conceivable that the blind trusts did something in the ballpark of required 2002-35 disclosure but less extreme and more legally defensible.
Still, willingness to do extremely aggressive tax sheltering (such as through loss generation from circular flows of cash) in 2009 would not come as a huge surprise, even though it seems like a dumb idea if you are preparing to run for president again. I wonder if the very fact that he was running for president might have led him to figure that he was audit-proof, on the ground that the IRS would look too political if it started challenging things.
I'm not sure how much credence to give this, but a Huffington Post commentator claims that, "according to people close to the situation, Romney would drop out of the presidential race before ever releasing further tax returns." That certainly sounds dire, and a huge 2009 gross income plus huge claimed losses, perhaps even topped off by amnesty income reports, would be one way of getting there.
Thursday, July 12, 2012
What's so special about "small business"?
Both presidential campaigns are eager to portray themselves as champions of "small business." So we have the Romney campaign misleadingly portraying the Obama Administration's proposal to let the top bracket return to 39.6% as in the main a tax increase for "small business." Part and parcel, of course, of their preferred new word for rich people, which is "job creators."
The Democrats, meanwhile, are pushing a bill in the Senate that would offer temporary tax credits for small businesses that hire new employees or increase their payrolls. This at least might be stimulative if it's properly designed, not too gameable, and does not create too many odd incentives at the margin. But there's no reason I can see to limit or direct it to small businesses. A job is a job, and a wage increase is a wage increase.
"Small business" sounds good rhetorically, whether you are trying to put a misleading face on support for the top 0.1%, like the Republicans, or simply trying for a more generally faux-populist tone, like the Democrats. Tax breaks for "big business" certainly don't sound as wholesome. But there is no particular reason to favor one part of the business sector over another, or to give businesses a tax incentive to stay small And even without the rhetorical edge, "small business" often has an advantage over "big business" in mustering political support in Congress, due to the advantages of being decentralized and hence in lots of members' districts, where the "small business" leaders often are prominent local personages and important campaign contributors. (I don't know if Citizens United, in addition to strengthening business interests' hand generally, has increased the political influence of "big business" relative to the more localized sector.)
The Democrats, meanwhile, are pushing a bill in the Senate that would offer temporary tax credits for small businesses that hire new employees or increase their payrolls. This at least might be stimulative if it's properly designed, not too gameable, and does not create too many odd incentives at the margin. But there's no reason I can see to limit or direct it to small businesses. A job is a job, and a wage increase is a wage increase.
"Small business" sounds good rhetorically, whether you are trying to put a misleading face on support for the top 0.1%, like the Republicans, or simply trying for a more generally faux-populist tone, like the Democrats. Tax breaks for "big business" certainly don't sound as wholesome. But there is no particular reason to favor one part of the business sector over another, or to give businesses a tax incentive to stay small And even without the rhetorical edge, "small business" often has an advantage over "big business" in mustering political support in Congress, due to the advantages of being decentralized and hence in lots of members' districts, where the "small business" leaders often are prominent local personages and important campaign contributors. (I don't know if Citizens United, in addition to strengthening business interests' hand generally, has increased the political influence of "big business" relative to the more localized sector.)
Wednesday, July 11, 2012
It's not actually about the Swiss bank account
You know the old joke, where the older man says to the younger one: "Is it for the likes of you that I lost my leg in the war?!?"
Younger man: "But, James, you have both your legs."
Older man: "I was speaking metaphorically, you fool!"
So it is, in a sense, with Romney's recently closed Swiss bank account.
Yesterday I was talking to a reporter about an upcoming story on Romney's tax and financial dealings, and I said about the Swiss bank account: That's probably not the issue at all. But what it is, is a metaphor for the things that actually are disturbing about Romney's highly secretive tax and financial dealings.
Swiss bank accounts have a bad reputation due to history, as well as Hollywood movies. If I recall rightly, in the Bourne movies our hero has a secret bank account there. OK, he's the good guy, but lots of people have historically used Swiss bank accounts over the decades to maintain extreme secrecy - sometimes, from tyrannical home country regimes or potential kidnappers or even spouses, but often because they were trying to conceal ill-gotten gains (e.g., tax fraudsters from countries such as the U.S., or looting dictators from other parts of the world).
Then of course there's the notoriety that Swiss bankers rightly earned for their dealings with high-ranking Nazis during and perhaps after World War II. However irrelevant today, this still helps empower the Swiss bank account as metaphor for other fishy things happening.
But all this has presumably has nothing to do with what makes so many people (including me) uneasy about Romney's financial dealings, as well as his personal and business ethics, such as they are. Now, I am starting to think that no wrongdoing on his part should be entirely ruled out, before there is evidence against it (which he is unwilling to provide), simply on the ground that "he's too smart to do something as crude and stupid as that." Again, Nixon, though no dummy, evidently wasn't too smart to do Watergate. And Romney appears to be so super-aggressive, so complacent about it, and so fundamentally tone-deaf, that he may well have done lots of things that we would have thought he was too smart to do. But still, I'd bet against the outright fraud and evasion that Swiss bank accounts at one time might have helped effectuate - and actually don't any more, in the aftermath of UBS and all that.
I'd say, if the veil ever lifts, reporters should look at all the Caymans stuff, and the $20M to $100M IRA, and the tax planning - was it clearly legally correct? Or was it super-aggressive, and nearing or even crossing lines? Ten to twelve years ago, for example, was he investing in outrageous tax shelter scams (such as Son-of-BOSS)? As distinct from focusing on the Swiss bank account.
In sum, when people say "Ooh, he had a Swiss bank account," while they may be deriving the right conclusion, they are deducing it from the wrong piece of evidence. But there really is a "Swiss bank account problem" - so long as we keep in mind that I am "speaking metaphorically, you fool."
UPDATE: A la the "Taxing Matter" blog, there are a few interesting questions about Romney's Swiss bank account that I didn't mention. Why did he have money there at a low rate of return, when the rationales offered are unpersuasive? Did he report and pay tax contemporaneously, or did he come in afterwards via the voluntary settlement initiative? Does UBS have anything to do with why he closed down the account?
So perhaps not entirely 100 percent just a metaphor.
Younger man: "But, James, you have both your legs."
Older man: "I was speaking metaphorically, you fool!"
So it is, in a sense, with Romney's recently closed Swiss bank account.
Yesterday I was talking to a reporter about an upcoming story on Romney's tax and financial dealings, and I said about the Swiss bank account: That's probably not the issue at all. But what it is, is a metaphor for the things that actually are disturbing about Romney's highly secretive tax and financial dealings.
Swiss bank accounts have a bad reputation due to history, as well as Hollywood movies. If I recall rightly, in the Bourne movies our hero has a secret bank account there. OK, he's the good guy, but lots of people have historically used Swiss bank accounts over the decades to maintain extreme secrecy - sometimes, from tyrannical home country regimes or potential kidnappers or even spouses, but often because they were trying to conceal ill-gotten gains (e.g., tax fraudsters from countries such as the U.S., or looting dictators from other parts of the world).
Then of course there's the notoriety that Swiss bankers rightly earned for their dealings with high-ranking Nazis during and perhaps after World War II. However irrelevant today, this still helps empower the Swiss bank account as metaphor for other fishy things happening.
But all this has presumably has nothing to do with what makes so many people (including me) uneasy about Romney's financial dealings, as well as his personal and business ethics, such as they are. Now, I am starting to think that no wrongdoing on his part should be entirely ruled out, before there is evidence against it (which he is unwilling to provide), simply on the ground that "he's too smart to do something as crude and stupid as that." Again, Nixon, though no dummy, evidently wasn't too smart to do Watergate. And Romney appears to be so super-aggressive, so complacent about it, and so fundamentally tone-deaf, that he may well have done lots of things that we would have thought he was too smart to do. But still, I'd bet against the outright fraud and evasion that Swiss bank accounts at one time might have helped effectuate - and actually don't any more, in the aftermath of UBS and all that.
I'd say, if the veil ever lifts, reporters should look at all the Caymans stuff, and the $20M to $100M IRA, and the tax planning - was it clearly legally correct? Or was it super-aggressive, and nearing or even crossing lines? Ten to twelve years ago, for example, was he investing in outrageous tax shelter scams (such as Son-of-BOSS)? As distinct from focusing on the Swiss bank account.
In sum, when people say "Ooh, he had a Swiss bank account," while they may be deriving the right conclusion, they are deducing it from the wrong piece of evidence. But there really is a "Swiss bank account problem" - so long as we keep in mind that I am "speaking metaphorically, you fool."
UPDATE: A la the "Taxing Matter" blog, there are a few interesting questions about Romney's Swiss bank account that I didn't mention. Why did he have money there at a low rate of return, when the rationales offered are unpersuasive? Did he report and pay tax contemporaneously, or did he come in afterwards via the voluntary settlement initiative? Does UBS have anything to do with why he closed down the account?
So perhaps not entirely 100 percent just a metaphor.
Monday, July 09, 2012
TV non-appearance
Tonight at 7 pm EST on CNN's Erin Burnett Outfront, there will be a feature on Romney's offshore accounts, including the tax planning motivations that one suspects may underlie them. I gather that Erin will name me as a source (via e-mail correspondence) for the basic tax analysis.
Nothing surprising or novel, at least so far as my contribution is concerned. Apart from the secrecy angle, which I assume isn't tax-related (as it's hard to believe Romney would commit outright fraud), I emphasized the tax planning objectives of avoiding (1) certain deduction limitations and (2) the debt-financed UBIT rules. David Miller discusses these issues, and others associated with using offshore entities, in much greater detail (though without specific reference to Romney) here.
Nothing surprising or novel, at least so far as my contribution is concerned. Apart from the secrecy angle, which I assume isn't tax-related (as it's hard to believe Romney would commit outright fraud), I emphasized the tax planning objectives of avoiding (1) certain deduction limitations and (2) the debt-financed UBIT rules. David Miller discusses these issues, and others associated with using offshore entities, in much greater detail (though without specific reference to Romney) here.
Saturday, July 07, 2012
Nice work if you can get it
Making derivatives trades that pay off based on the LIBOR rate, and then getting to rig a fake LIBOR rate so you're guaranteed to win, is certainly a lucrative way to do business.
Am I wrong to be confident that Romney would back the rogue banks on this one, and oppose investigating or sanctioning them?
Am I wrong to be confident that Romney would back the rogue banks on this one, and oppose investigating or sanctioning them?
Friday, July 06, 2012
Romney's IRA again
I am quoted in this Talking Points Memo post, from an interview that I conducted some time back, regarding the extraordinary accumulation of wealth in Romney's IRA, which has more than $100 million in it. The angle that I discuss, though certainly relevant, is not in fact the biggest takeaway from the story.
As I note, while we can't know anything for sure because Romney is so determined to minimize any disclosure, there is reason to surmise that he may have used Caymans "blocker" entities to avoid U.S. unrelated business income tax (UBIT) on IRA-level borrowing. The basic trick is that, instead of borrowing to hold stock that appreciates and pays dividends, you create a Caymans entity that does the borrowing and holds the stock. This would increase the gross assets that the IRA could hold, through what is basically a loophole in the UBIT rules, circumvening their limitation on the use of direct borrowing to create tax-exempt investment income.
In defense of this use of "blocker" entities, not only does it appear to be the case that "everyone does it" (i.e., not just the most aggressive taxpayers), but in addition Congress has looked at the problem and declined to act, plus it is very difficult to devise a compelling rationale for the UBIT rule that Romney may be avoiding. That is, if we allow tax-exempt entities such as IRA vehicles to invest tax-free, why shouldn't the rules let them borrow non-deductibly to invest still more tax-free. There's no tax arbitrage involved here, given that the exemption is symmetric on the inclusion and deduction sides.
Despite this point, one could certainly argue that it is unseemly for a presidential candidate to be using Caymans or other such "blocker" entities to avoid the UBIT. I have no especially strong opinion on this argument, one way or the other, given that the tax planning is widespread, clearly works, and avoids an anti-borrowing rule that lacks any compelling rationale.
The bigger issue raised by Romney's $100 million IRA is whether - as I would have to say seems extremely plausible, just from the otherwise unlikely facts that we know - he grossly undervalued the assets that the IRA holds when he placed them inside, in order to evade - not just avoid - the annual contribution limits. Ed Kleinbard explains the basic issue here. Again, a Romney defender might be factually correct in arguing that "everyone does it" (so long, as by "everyone," we are understood to mean high-flyers like Romney who have access to special insiders' classes of non-publicly traded financial instruments.). But in this case the "it" would be violating the law, not just engaging in a clearly legally effective tax planning strategy. That would certainly strike me as inappropriate, and as raising broader questions about Romney's character and general modus operandi.
Romney says that he takes care to pay the taxes he owes and not a penny more. But of course the law is not always clear, and aggressive tax planning that one expects to get away with (or at least to be able to engage in without fear of getting hit by penalties) is not exactly up to the highest standard.
Everyone assumes that Romney must be tax-planning within the law, because it would be stupid to take chances and besides he is cautious. This reminds me a bit of the arguments a few decades back that of course Nixon wouldn't be involved in planning things like the Watergate break-in, because surely he wasn't that stupid. In assessing the claim about Romney, we should keep in mind that he is extremely aggressive, pushing the limits past where most other people would stop, with regard to little things like telling repeated lies on the campaign trail (e.g., regarding Obama's supposed apology tour). While I'm sure that he is too smart and cautious to have engaged in, let's call it stupid people's tax fraud, such as omitting gross income and claiming fake deductions, his perspective on tax planning may be such that he just doesn't consider it a problem to engage in extremely aggressive tax planning that some people would regard as far out on the abusive tax shelter fringe. It may just be how he does things.
Likewise, his extreme penchant for secrecy (e.g., not disclosing any pre-2010 tax returns) does not necessarily have a relatively innocent explanation, even though one could come up with such explanations. We know, for example, that in 2009 he completely zeroed out his capital gains income from the carried interest fees, but actually showing this would be worse for him than our merely knowing it. So he wouldn't have to be hiding bad stuff in order to be as secretive as he is about prior years' returns. But I see no reason for giving him the benefit of the doubt about this.
As I note, while we can't know anything for sure because Romney is so determined to minimize any disclosure, there is reason to surmise that he may have used Caymans "blocker" entities to avoid U.S. unrelated business income tax (UBIT) on IRA-level borrowing. The basic trick is that, instead of borrowing to hold stock that appreciates and pays dividends, you create a Caymans entity that does the borrowing and holds the stock. This would increase the gross assets that the IRA could hold, through what is basically a loophole in the UBIT rules, circumvening their limitation on the use of direct borrowing to create tax-exempt investment income.
In defense of this use of "blocker" entities, not only does it appear to be the case that "everyone does it" (i.e., not just the most aggressive taxpayers), but in addition Congress has looked at the problem and declined to act, plus it is very difficult to devise a compelling rationale for the UBIT rule that Romney may be avoiding. That is, if we allow tax-exempt entities such as IRA vehicles to invest tax-free, why shouldn't the rules let them borrow non-deductibly to invest still more tax-free. There's no tax arbitrage involved here, given that the exemption is symmetric on the inclusion and deduction sides.
Despite this point, one could certainly argue that it is unseemly for a presidential candidate to be using Caymans or other such "blocker" entities to avoid the UBIT. I have no especially strong opinion on this argument, one way or the other, given that the tax planning is widespread, clearly works, and avoids an anti-borrowing rule that lacks any compelling rationale.
The bigger issue raised by Romney's $100 million IRA is whether - as I would have to say seems extremely plausible, just from the otherwise unlikely facts that we know - he grossly undervalued the assets that the IRA holds when he placed them inside, in order to evade - not just avoid - the annual contribution limits. Ed Kleinbard explains the basic issue here. Again, a Romney defender might be factually correct in arguing that "everyone does it" (so long, as by "everyone," we are understood to mean high-flyers like Romney who have access to special insiders' classes of non-publicly traded financial instruments.). But in this case the "it" would be violating the law, not just engaging in a clearly legally effective tax planning strategy. That would certainly strike me as inappropriate, and as raising broader questions about Romney's character and general modus operandi.
Romney says that he takes care to pay the taxes he owes and not a penny more. But of course the law is not always clear, and aggressive tax planning that one expects to get away with (or at least to be able to engage in without fear of getting hit by penalties) is not exactly up to the highest standard.
Everyone assumes that Romney must be tax-planning within the law, because it would be stupid to take chances and besides he is cautious. This reminds me a bit of the arguments a few decades back that of course Nixon wouldn't be involved in planning things like the Watergate break-in, because surely he wasn't that stupid. In assessing the claim about Romney, we should keep in mind that he is extremely aggressive, pushing the limits past where most other people would stop, with regard to little things like telling repeated lies on the campaign trail (e.g., regarding Obama's supposed apology tour). While I'm sure that he is too smart and cautious to have engaged in, let's call it stupid people's tax fraud, such as omitting gross income and claiming fake deductions, his perspective on tax planning may be such that he just doesn't consider it a problem to engage in extremely aggressive tax planning that some people would regard as far out on the abusive tax shelter fringe. It may just be how he does things.
Likewise, his extreme penchant for secrecy (e.g., not disclosing any pre-2010 tax returns) does not necessarily have a relatively innocent explanation, even though one could come up with such explanations. We know, for example, that in 2009 he completely zeroed out his capital gains income from the carried interest fees, but actually showing this would be worse for him than our merely knowing it. So he wouldn't have to be hiding bad stuff in order to be as secretive as he is about prior years' returns. But I see no reason for giving him the benefit of the doubt about this.
I agree more with the conclusion than with the analysis
A Wednesday op-ed in the New York Times by Yoram Bauman and Shi-Ling Hsu, entitled "The Most Sensible Tax of All," urges U.S. adoption of a carbon tax, with the revenues being used to reduce various taxes on individuals and businesses. A $30 per ton carbon tax, they say, could raise $145 billion a year, or enough to fund a 10 percent reduction in individual and corporate income taxes, repeal of the estate tax, and the enactment of refundable credits or targeted payroll tax cuts to offset the burden of the carbon tax on low-income households.
What's odd about the analysis is that, while the authors note that a carbon tax would be expected to reduce carbon emissions, they argue that it is a good thing wholly independently of the effect on global warming. Even climate skeptics, they say, should support it. They base this conclusion on two arguments: (1) the overall package would "reduce the economic drag created by our current tax system and increase long-run growth by nudging the economy away from consumption and borrowing and toward saving and investment," and (2) it would be a pollution tax.
Here's the problem. I certainly think the case that carbon emissions are contributing to deadly global warming is overwhelmingly strong. Thus, I support the global adoption of carbon taxes. Moreover, while intellectually it's a closer case whether the U.S. should act unilaterally - given that the scope of the problem is global, hence we don't capture all the benefit, there can be "leakage" if carbon-intensive production simply shifts overseas, etcetera - my bottom line is that we should. I base this conclusion not just on the sheer gravity of the global warming problem but also on the hope that U.S. action could promote significant movement in other countries towards taking remedial action.
But just to be a purist, suppose one believed that all this wasn't true - either because one rejected the evidence for global warming, or because one was convinced that U.S. enactment of a carbon tax would have no significant net effect on global carbon emissions. Then the carbon tax would have lost its central rationale, yet Bauman and Hsu would still support it.
This is a bit odd. If carbon weren't a bad, or if taxing it unilaterally had no net effect on it as a bad, a carbon tax would be a very strange design for a consumption tax. And it would only be a pollution tax insofar as emitting carbon correlated with emitting other pollutants that are untaxed or at least under-taxed. This actually might be true - gasoline use, for example, emits carbon but may also be undertaxed as a pollutant in other respects. But the carbon abatement that the tax would encourage presumably wouldn't be the ideal proxy for abating other pollution.
Anyway, all this is academic (but then I am an academic), given that I accept the central premise of a carbon tax, which is that the U.S. should adopt it, even unilaterally at first, in order to address global warming. And I suppose even their argument, even if questionable, would serve a good cause if (as seems unlikely) it helped induce U.S. adoption of a carbon tax. But in the end it is still hard to rationalize taxing carbon unless you recognize and accept that carbon emission has bad effects.
What's odd about the analysis is that, while the authors note that a carbon tax would be expected to reduce carbon emissions, they argue that it is a good thing wholly independently of the effect on global warming. Even climate skeptics, they say, should support it. They base this conclusion on two arguments: (1) the overall package would "reduce the economic drag created by our current tax system and increase long-run growth by nudging the economy away from consumption and borrowing and toward saving and investment," and (2) it would be a pollution tax.
Here's the problem. I certainly think the case that carbon emissions are contributing to deadly global warming is overwhelmingly strong. Thus, I support the global adoption of carbon taxes. Moreover, while intellectually it's a closer case whether the U.S. should act unilaterally - given that the scope of the problem is global, hence we don't capture all the benefit, there can be "leakage" if carbon-intensive production simply shifts overseas, etcetera - my bottom line is that we should. I base this conclusion not just on the sheer gravity of the global warming problem but also on the hope that U.S. action could promote significant movement in other countries towards taking remedial action.
But just to be a purist, suppose one believed that all this wasn't true - either because one rejected the evidence for global warming, or because one was convinced that U.S. enactment of a carbon tax would have no significant net effect on global carbon emissions. Then the carbon tax would have lost its central rationale, yet Bauman and Hsu would still support it.
This is a bit odd. If carbon weren't a bad, or if taxing it unilaterally had no net effect on it as a bad, a carbon tax would be a very strange design for a consumption tax. And it would only be a pollution tax insofar as emitting carbon correlated with emitting other pollutants that are untaxed or at least under-taxed. This actually might be true - gasoline use, for example, emits carbon but may also be undertaxed as a pollutant in other respects. But the carbon abatement that the tax would encourage presumably wouldn't be the ideal proxy for abating other pollution.
Anyway, all this is academic (but then I am an academic), given that I accept the central premise of a carbon tax, which is that the U.S. should adopt it, even unilaterally at first, in order to address global warming. And I suppose even their argument, even if questionable, would serve a good cause if (as seems unlikely) it helped induce U.S. adoption of a carbon tax. But in the end it is still hard to rationalize taxing carbon unless you recognize and accept that carbon emission has bad effects.