October 16, 2019

Romney’s Tax Returns Show How Laws Favor the Wealthy

Yet the hundreds of pages of tax documents released by Mr. Romney’s campaign on Tuesday morning did not readily reveal any elaborate financial legerdemain or exotic tax shelters. What Mr. Romney’s returns illustrated, instead, was the array of perfectly ordinary ways in which the United States tax code confers advantages on the rich, allowing Mr. Romney to amass wealth under rules very different from those faced by most Americans who take home a paycheck.

Those differences leapt to the front of the national debate on Tuesday when President Obama — whose family’s income was less than a tenth of Mr. Romney’s in 2010 but whose effective federal rate was double — called for higher taxes on the wealthy in his State of the Union speech.

Mr. Romney’s tax returns were posted on his campaign’s Web site on Tuesday morning after escalating pressure from the other Republican candidates, Democrats and even supporters, some of whom attributed his loss in South Carolina’s Republican primary last weekend to his shifting and tentative responses to questions about his wealth, tax burden and overseas investments.

The 547 pages of documents included 2010 federal income tax returns for the Romneys, the couple’s estimated 2011 return and returns for their charitable foundation and two blind trusts established in their names, as well as a trust established for their children.

The couple paid about $3 million in federal taxes on an adjusted gross income of $21.6 million, the vast majority of it flowing from myriad of stock holdings, mutual funds and other investments, including profits and investment income from Bain Capital, the private equity firm Mr. Romney retired from in 1999.

The couple reported no wage earnings in 2010. But in a conference call with reporters on Tuesday, Mr. Romney’s campaign counsel, Benjamin L. Ginsberg, said that Mr. Romney and his wife collected more than $7 million worth of Bain profits in 2010.

That money — about a quarter of the couple’s income during the last two years — came in the form of so-called carried interest. It would be taxed not as deferred regular income, but at the lower 15 percent rate normally reserved for long-term capital gains, thanks to federal tax rules that have sparked intense debate in recent years.

Mr. Obama and others have argued that carried interest should be taxed at the rates which normally apply to income earned by people providing services, topping out at 35 percent. If Mr. Romney’s carried interest income in the last two years had been taxed at that higher rate, he would have owed about $4.8 million in federal taxes, roughly $2.6 million more than he would typically be assessed under current rules.

And like most of the wealthy, the Romneys paid only a tiny sliver of their income in payroll taxes, which cut heavily into the weekly paychecks of wage earners but is barely a blip on the returns of the rich. While payroll taxes eat up 6 percent of the income of Americans earning the national median income of $50,221, Mr. Romney and his wife paid just one-tenth of 1 percent of their income in payroll taxes.

Mr. Romney’s 2010 returns also suggest he may have paid far less taxes the previous year. The 2010 return shows the family made estimated tax payments for 2009 of $1,369,095. To avoid penalties, estimated tax payments must be at least 110 percent of the taxes owed the prior year. Assuming that is what he paid, his federal tax bill for 2009 would have been $1,244,632, far less than in 2010.

Mr. Romney and other Republican candidates have not only opposed higher taxes on the wealthy, but also favor maintaining or expanding the relatively low rates for capital gains and investment income, breaks that Republicans and others favor as a way to spur investment and reward risk-taking but which critics say have fed the growing wealth gap.

Floyd Norris, Stephanie Strom and Kevin Roose contributed reporting.

This article has been revised to reflect the following correction:

Correction: January 24, 2012

A previous version of this article misstated the number of I.P.O. shares of Goldman Sachs that the Romneys bought in 1999; it was 7,000 shares, not 6,000. The article also misstated the share price and total when the shares were sold in 2010; the Romneys sold them for $161.45 apiece, or $1,130,123.87.

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Wealth Matters: Tax Burdens Tilt Coastal, and System’s Fairness Is Debated

But is that really the marker of wealth? After all, earning $250,000 a year in New York does not buy as much as it does in, say, Iowa or Alabama.

Or put another way: Why doesn’t the tax code account for regional differences in tax burdens?

While the question begins with households earning more than $250,000 a year in places like Boston, New York and San Francisco, the issue of fairness is not just for the top 2 percent to ponder. Workers at all income levels are affected by regional differences in federal taxes. Local taxes may also be high in these areas, though economists argue that residents at least get something for those taxes, like good schools and safe neighborhoods. According to David Yves Albouy, an assistant professor of economics at the University of Michigan and an expert on geographic tax inequality, teachers in New York may be among the highest paid in the country, but their salaries don’t give them any extra buying power because the cost of living is so high.

The average pay of a New York public school teacher in 2009-10 was $78,885. But rent for a two-bedroom apartment in Manhattan averages $3,715 a month.

In an article, “The Unequal Geographic Burden of Federal Taxation,” published in the Journal of Political Economy in 2009, Dr. Albouy wrote that wages in New York were 21 percent higher than the national average. At a 33 percent federal income tax rate, workers were paying a 7 percent federal surtax for working here. But even for someone making $50,000 a year, that surcharge worked out to about $3,500 extra a year, he said.

“A lot of the 1 percent lives in New York,” he said, “but I’d say 98 percent of the people who live in New York are part of the 99 percent, and they get the short end of the stick.”

But while one presidential candidate after another has been proposing new tax regimes, none so far has mentioned equalizing the regional differences.

“The system is not totally fair, but I guess the question is, who is it most unfair to?” said Mark Luscombe, principal federal tax analyst for CCH, a publisher of research and software for tax lawyers and accountants. “It’s most unfair to the New Yorker, and no one has much sympathy for the New Yorker.”

Or as Joseph J. Thorndike, the director of the tax history project at Tax Analysts, said, any regional adjustment “might as well be called the Bicoastal Elite Tax Relief Act.” He added, “It would shower all these benefits on Palo Alto and New York City, and the rest of the country would be outraged.”

Still, there are some interesting issues here that raise questions about how we think about fairness and taxation. If nothing else, they will help inform your next cocktail party conversation (or argument).

CURRENT SYSTEM The debate over regional differences is nothing new, Dr. Thorndike said. When the modern tax code went into effect in 1913, “it was viewed as a way to tax those rich Northerners, and to be fair, that’s what it was,” he said.

But starting in World War II, when the tax base widened beyond the wealthiest people, he said, the tax system had to be sold as a shared sacrifice. With this came the idea of horizontal equity — that people at the same level pay the same rate across America.

Today, residents of New York pay about $15 billion a year more in federal taxes than they receive in benefits, Dr. Albouy said. He noted that that money would make quite a dent in the cost of the Second Avenue subway line, which is estimated at $17 billion.

Still, the high earners living in expensive areas are able to take deductions that reduce some of their federal tax burden. These include breaks on mortgage interest, state income and property taxes and charitable gifts.

A flat tax may seem, at first glance, more equitable, but it may mean that people in high-cost areas would lose the deductions that lower their tax bills, Dr. Luscombe said.

GEOGRAPHICALLY FAIR SYSTEM So how would you make the tax system fairer for people who live in more expensive regions?

A cost-of-living adjustment is one way. The military offers that to soldiers stationed in different parts of the country. But measures of the cost of living are considered pretty inaccurate.

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Top Earners Doubled Share of Nation’s Income, C.B.O. Says

In addition, the report said, government policy has become less redistributive since the late 1970s, doing less to reduce the concentration of income.

“The equalizing effect of federal taxes was smaller” in 2007 than in 1979, as “the composition of federal revenues shifted away from progressive income taxes to less-progressive payroll taxes,” the budget office said.

Also, it said, federal benefit payments are doing less to even out the distribution of income, as a growing share of benefits, like Social Security, goes to older Americans, regardless of their income.

The report, requested several years ago, was issued as lawmakers tussle over how to reduce unemployment, a joint committee of Congress weighs changes in the tax code and protesters around the country rail against disparities in income between rich and poor.

In its report, the budget office found that from 1979 to 2007, average inflation-adjusted after-tax income grew by 275 percent for the 1 percent of the population with the highest income. For others in the top 20 percent of the population, average real after-tax household income grew by 65 percent.

By contrast, the budget office said, for the poorest fifth of the population, average real after-tax household income rose 18 percent.

And for the three-fifths of people in the middle of the income scale, the growth in such household income was just under 40 percent.

The findings, based on a rigorous analysis of data from the Internal Revenue Service and the Census Bureau, are generally consistent with studies by some private researchers and academic economists. But because they carry the imprimatur of the nonpartisan budget office, they are likely to have a major impact on the debate in Congress over the fairness of federal tax and spending policies.

Also cited as factors contributing to the rapid growth of income at the top were the structure of executive compensation; high salaries for some “superstars” in sports and the arts; the increasing size of the financial services industry; and the growing role of capital gains, which go disproportionately to higher-income households.

The report found that higher-income households got a larger share of the pie, while other households got smaller shares.

Specifically the report made these points:

¶ The share of after-tax household income for the top 1 percent of the population more than doubled, climbing to 17 percent in 2007 from nearly 8 percent in 1979.

¶ The most affluent fifth of the population received 53 percent of after-tax household income in 2007, up from 43 percent in 1979. In other words, the after-tax income of the most affluent fifth exceeded the income of the other four-fifths of the population.

¶ People in the lowest fifth of the population received about 5 percent of after-tax household income in 2007, down from 7 percent in 1979.

¶ People in the middle three-fifths of the population saw their shares of after-tax income decline by 2 to 3 percentage points from 1979 to 2007.

The study was requested by Senators Max Baucus, Democrat of Montana and chairman of the Finance Committee, and Charles E. Grassley of Iowa, when he was the senior Republican on the panel.

Representative Sander M. Levin of Michigan, the senior Democrat on the Ways and Means Committee, said the report was “the latest evidence of the alarming rise in income inequality.”

House Republicans pushed back Tuesday against President Obama’s complaint that they were blocking bills to create jobs. Speaker John A. Boehner said he agreed with Mr. Obama’s new slogan, “we can’t wait,” and he said that 15 House-passed bills were “sitting over in the Senate, waiting for action.”

On Tuesday, the White House endorsed another bill, which is likely to be passed by the House this week with bipartisan support. The bill would repeal a requirement for federal, state and local government agencies to withhold 3 percent of certain payments to suppliers of goods and services and to deposit the money with the Internal Revenue Service.

This requirement was originally adopted as a tax-compliance measure, and the Congressional Budget Office said its repeal would reduce federal revenues by $11 billion over 10 years.

House Republicans would offset the cost with a bill that reduces federal spending on Medicaid under the 2010 health care law. The White House said it supported the bill, intended to fix an apparent error in the law, under which hundreds of thousands of middle-income early retirees can get Medicaid coverage meant for the poor.

The joint Congressional committee on deficit reduction is considering changes in a wide range of benefit programs.

Representative Steny H. Hoyer of Maryland, the No. 2 House Democrat, said Tuesday that he was hopeful but not entirely confident that the panel would succeed in reaching a bipartisan agreement to reduce federal deficits by $1.2 trillion over 10 years.

“Hopeful is not confident,” Mr. Hoyer said.

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Economix: Are the Bush Tax Cuts the Root of Our Fiscal Problem?

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Bruce Bartlett held senior policy roles in the administrations of Ronald Reagan and George H.W. Bush and served on the staffs of Representatives Jack Kemp and Ron Paul.

Whether revenue should play any role in deficit reduction is at the root of the fiscal impasse between Congressional Republicans and President Obama. One factor underlying the hard-line Republican position that taxes must not be increased by even $1 is their assertion that the Bush tax cuts played no role in creating our deficit problem.

Today’s Economist

Perspectives from expert contributors.

In a previous post, I noted that federal taxes as a share of gross domestic product were at their lowest level in generations. The Congressional Budget Office expects revenue to be just 14.8 percent of G.D.P. this year; the last year it was lower was 1950, when revenue amounted to 14.4 percent of G.D.P.

But revenue has been below 15 percent of G.D.P. since 2009, and the last time we had three years in a row when revenue as a share of G.D.P. was that low was 1941 to 1943.

Revenue has averaged 18 percent of G.D.P. since 1970 and a little more than that in the postwar era. At a similar stage in previous business cycles, two years past the trough, revenue was considerably higher: 18 percent of G.D.P. in 1977 after the 1973-75 recession; 17.3 percent of G.D.P. in 1984 after the 1981-82 recession, and 17.5 percent of G.D.P. in 1993 after the 1990-91 recession. Revenue was markedly lower, however, at this point after the 2001 recession and was just 16.2 percent of G.D.P. in 2003.

The reason, of course, is that taxes were cut in 2001, 2002, 2003, 2004 and 2006.

It would have been one thing if the Bush tax cuts had at least bought the country a higher rate of economic growth, even temporarily. They did not. Real G.D.P. growth peaked at just 3.6 percent in 2004 before fading rapidly. Even before the crisis hit, real G.D.P. was growing less than 2 percent a year.

By contrast, after the 1982 and 1993 tax increases, growth was much more robust. Real G.D.P. rose 7.2 percent in 1984 and continued to rise at more than 3 percent a year for the balance of the 1980s.

Real G.D.P. growth was 4.1 percent in 1994 despite widespread predictions by opponents of the 1993 tax increase that it would bring on another recession. Real growth averaged 4 percent for the balance of the 1990s. By contrast, real G.D.P. growth in the nonrecession years of the 2000s averaged just 2.7 percent a year — barely above the postwar average.

Few people remember that a major justification for the 2001 tax cut was to intentionally slash the budget surplus. President Bush said this repeatedly during the 2000 campaign, and it was reiterated in his February 2001 budget document.

In this regard, at least, the Bush-era tax cuts were highly successful. According to a recent C.B.O. report, they reduced revenue by at least $2.9 trillion below what it otherwise would have been between 2001 and 2011. Slower-than-expected growth reduced revenue by another $3.5 trillion.

Spending was $5.6 trillion higher than the C.B.O. anticipated for a total fiscal turnaround of $12 trillion. That is how a $6 trillion projected surplus turned into a cumulative deficit of $6 trillion.

Congressional Budget Office

These figures are conservative insofar as revenue is concerned, because the higher interest payments required by the deficits created by the Bush tax cuts are allocated to spending. If one allocates the interest cost proportionally, the Bush tax cuts were responsible for increasing the debt by $3.2 trillion — 27 percent of the fiscal deterioration since 2001.

These facts notwithstanding, it has become a Republican talking point that the Bush tax cuts did not, in fact, reduce revenue at all — something the Bush administration itself never asserted.

Last year, Mitch McConnell of Kentucky, the Senate minority leader, said: “There’s no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue because of the vibrancy of these tax cuts in the economy.”

On June 10, former Minnesota Gov. Tim Pawlenty said, “Keep in mind, whether it be the Bush tax cuts, the Reagan tax cuts or other tax cuts, they always produce an increase in revenue.”

On July 10, Senator Jeff Sessions of Alabama said of the Bush tax cuts, “The revenue went up every single year after those tax cuts were put in.”

And on July 15, Representative Trent Franks of Arizona said, “Even the much-maligned Bush tax cuts brought in an additional $100 billion a year to government coffers.”

It is hard to know where these totally erroneous ideas come from. Federal revenue fell in 2001 from 2000, again in 2002 from 2001 and again in 2003 from 2002. Revenue did not get back to its 2000 level until 2005. More important, revenue as a share of G.D.P. was lower every year of the Bush presidency than it was in 2000.

Congressional Budget Office

What will happen at the end of next year when the Bush tax cuts expire is already a matter of intense budget negotiations. Perhaps the whole point of the apparent Republican disinformation effort to deny that the Bush tax cuts reduced federal revenue is to make the reverse argument next year — allowing them to expire will not raise revenue.

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Economix: A Long Shot Bets on the ‘Fair Tax’

Today's Economist

Bruce Bartlett has served as an economic adviser in the White House, Treasury and Congress.

Herman Cain, who announced Saturday that he was seeking the Republican nomination for president, spoke in March at the Conservative Principles Conference in Des Moines.Charlie Neibergall/Associated PressHerman Cain, who announced Saturday that he was seeking the Republican nomination for president, spoke in March at the Conservative Principles Conference in Des Moines.

On Saturday, the pizza magnate Herman Cain announced that he was running for the Republican presidential nomination. While he has to be considered a long shot, he has something going for him that could make him surprisingly viable: his strong support for the so-called Fair Tax.

The Fair Tax is a proposal that has been kicking around for at least 20 years. It would replace all federal taxes, including income and payroll taxes, with a national retail sales tax similar to those levied by the states. Indeed, a prime virtue of the Fair Tax, in the eyes of its supporters, is that it would be collected by the states, thus allowing for abolition of the hated Internal Revenue Service and an end to filing tax returns or keeping financial records.

The rate would be set at 23 percent — but only if you accept the unconventional way in which Fair Tax supporters insist on calculating it. If calculated the way state and local sales taxes are calculated, the Fair Tax rate is actually 30 percent.

Its supporters say 23 percent because a 30 percent sales tax on a $1 purchase would yield an after-tax price of $1.30 and the 30 cent tax is 23 percent of $1.30. I’ve always viewed this as legerdemain designed solely to disguise how high the rate is, but Fair Tax supporters are convinced that their unorthodox way of calculating it is the correct way of doing so.

This is not the only odd feature of the Fair Tax. Another is that governments would have to pay the tax on their purchases, including the federal government, which would pay the tax to itself. Although Fair Tax supporters claim that the purpose of this provision is to prevent people from substituting government consumption for private consumption, the true purpose is to cut government spending by the amount of the tax.

Because the Fair Tax assumes that government spending would be frozen in nominal terms, if the government has to pay 30 percent more for everything it purchases, even though it is paying the tax to itself, real spending must necessarily fall by the amount of the tax.

Another oddity is that Fair Tax supporters insist that once all existing federal taxes are abolished, prices of all consumer goods will instantly fall by about 22 percent. If prices rise 23 percent because of the new sales tax, nominal prices should be about the same as they are now, they say.

At the same time, Fair Tax supporters would also institute a national rebate equal to the tax rate on a poverty level income. Quite apart from the obvious fact that politicians would use this rebate to buy votes – an election-year increase is practically guaranteed – why is the rebate necessary if there is no change in the prices of goods? And because no one is paying income or payroll taxes any more, everyone should have plenty of extra money to spend, right?

It turns out that an unstated assumption of the Fair Tax is that all wages will fall by the amount of income and payroll taxes people now pay. That’s the key reason why producers and retailers will be able, theoretically, to cut their prices.

However, nothing in the Fair Tax compels workers to accept pay cuts and there is no reason to think that they won’t strenuously resist them.

A final oddity of the Fair Tax is that for as long as I have heard of this proposal, its supporters have consistently maintained that a 23 percent rate would exactly equal current federal revenues. Over this period, revenues have been as high as 20.6 percent of gross domestic product, in 2000, and as low as 14.9 percent now.

So either the Fair Tax would have been a huge tax cut 10 years ago or it would be a huge tax increase today.

Despite the transparent silliness of the Fair Tax, in my opinion and those of most serious economists, it has strong support among a small and well-financed group of enthusiasts. In 2007, Mike Huckabee, the former governor of Arkansas, was their guy, and it was absolutely critical to his rapid rise from obscurity to serious contender for the Republican presidential nomination.

Mr. Huckabee is not running this time, but Mr. Cain has made the Fair Tax a cornerstone of his campaign. Most political analysts don’t view him as a serious contender and see the Fair Tax as baggage to be overcome, not a political asset.

While radical and controversial ideas are generally viewed as political albatrosses in general elections because they appeal only to a fringe element within one party, they can be very valuable in primary campaigns. Especially in a divided field with no clear favorite, such as Republicans have today, proposals such as the Fair Tax energize true believers and provide contributions and manpower that can propel an outsider into contention.

Of course, there is nothing to stop other Republican candidates from endorsing the Fair Tax. But the tax’s supporters tend to be very loyal to the candidate who does so first and most passionately. In this election cycle, that person is Herman Cain.

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