While Romney's 2011 income tax return is unlikely to contain any surprises once it has been more carefully scrutinized, I thought the content and omissions from the letter he released from PricewaterhouseCoopers (PWC) were much more significant.
Here are the key paragraphs from PWC's letter to Romney, with my comments interspersed:
"Each year during the period [from 1990-2009], there were federal and state income taxes owed...."
COMMENT: Okay, this is a flat rebuttal of the suggestion that he ever paid zero in a year during this period. Despite the well-known principle "Trust, but verify" - and the fact that we are being asked to accept this without verification - I am inclined to accept the claim, on the view that PWC wouldn't want to risk issuing a signed letter with a false statement.
"The lowest of any annual 'effective federal personal income tax rate' for any year during the period is 13.66%. As you requested, we computed each annual 'effective federal personal income tax rate as total taxes divided by adjusted gross income as shown on the federal income tax returns as prepared.
"The average of the annual 'effective federal personal income tax rates' as computed based on the returns as prepared during the period is 20.20%."
COMMENT: While I am willing to accept this true, it is uninformative, one could even say evasive, and deliberately so. The problem is that we don't know if he accomplished this by having high adjusted gross income (AGI) and taxes paid, or low AGI and taxes paid.
Suppose we are considering 1998 or 2004, it doesn't really matter which year, and that Romney's effective tax rate for that year was 15%. Using pretend numbers for simplicity, this is consistent with both of the following two possibilities:
(a) Romney reported AGI of $100,000 and paid $15,000 of tax;
(b) Romney reported AGI of $10 million and paid $1.5 million of tax.
These would both yield effective tax rates of 15% under the PWC methodology, but they simply are not the same thing. In case (a), there would be a strong inference of massive tax sheltering, such as by having big losses from tax shelter transactions. In case (b), we might figure that the capital gains rate did most of the work, aided by the charitable contributions deduction.
The front page of the website where the Romney campaign has posted the tax returns and PWC letter states the following:
“Governor Romney's tax returns show:
“First, as a successful businessman, Governor Romney has not only added value to our economy through his investment and business activity, but he has paid millions in taxes every year to the U.S. government.”
That would answer my point if true, but it simply is not verified, or in any way addressed, by the PWC letter. And it is hard to reconcile with 2009, when he had zero net capital gain. In that year, it seems unlikely that his tax liability was as high as $1 million. (Look at the 2010 and 2011 returns, but supposing that they had zero capital gains, and note that qualifying dividends, which would still be there, only get a 15% rate.)
To compute the effective tax rates, PWC needed to pull two numbers from the tax return for each year in the period: AGI and income tax liability. Why not simply disclose those numbers? It would have wholly answered this line of inquiry - although there would still be a number of other issues to wonder about. The effective tax rate calculation permits us to see the tax benefits that he derived from (1) paying tax on much of his Bain income at the capital gains rate, (2) for years starting after the 2003 Bush tax cuts, the 15% dividend rate, and (3) the charitable contributions deduction. But it fails to reveal any tax benefit that he derived from (1) using tax planning to keep economic income off the tax return, and more importantly (2) generating either capital or ordinary loss deductions. So it is pretty inadequate disclosure, and entirely unnecessarily so given that they had the fuller information at hand but chose not to release it. Even if that information did come out, there would still be further questions. For example, did he claim capital gains treatment for what were effectively late-in-the-day fee conversions that arguably did not pass muster legally? And what about the possibility that he dramatically undervalued stocks that were placed in his IRA or gifted to his sons? That wouldn't be revealed by the AGI and taxes paid disclosures either. But those disclosures would be a start that he evidently has decided would be a bridge too far.