Friday, August 10, 2012

Romney Scandal on Personal Taxes

I have no idea whether Harry Reid’s “source” is correct that Mitt Romney avoided paying any income taxes for ten years. Furthermore, that fact is not per se important. Judge Learned Hand’s opinion in Gregory v. Helvering states in part:

"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

The scandal of Romney’s position to only release the last two years of his personal income taxes is not the possibility that he paid no taxes for a decade. If Romney and his tax accountants and lawyers figured out how to legally use the tax code to avoid or defer paying income taxes, more power to them and more reason to eliminate all the deductions under the tax code. (See the Jim JacksonSimplified Tax Plan.)

The scandal is that Romney asks voters to trust him to be president, but he does not trust voters enough to provide them information they need to make an informed decision. When his father ran for president, the senior Romney released twelve years of tax returns.

The son is hiding his past and he is a very smart man; there must be a reason.

The reason can’t be that voters will be distressed about how much money he made. We already know he made a ton, and most people do not begrudge him for it. Americans like success stories. Romney is running for president in large part based on his demonstrated abilities to run large, complex organizations (Bain Capital and the Salt Lake City Olympics).

The reason must be how he arranged his finances relative to US tax laws. As Judge Hand said over seventy-five years ago, there is no sin in paying the minimum taxes required by law. However, if Romney used discredited tax shelters or off-shore tax shelters that he underreported and later took advantage of tax amnesty programs, voters should be so informed.

How did Romney build his IRA to over $100 million? If he presciently purchased stocks that increased over 100-fold in a few short years, he should be trumpeting his financial acumen. If, as some have suggested, he made IRA contributions of purposefully undervalued stock to circumvent the annual deduction limits, voters should know. Again, I have no clue how he grew such an outsized IRA, but I do believe voters have a right to understand the mechanics of this amazing financial result.

When a company decides to put itself on the block it dresses its financial statements in as attractive clothing as it can muster. Analysts know to look past the stated numbers and carefully read the footnotes to understand how the financial statements were prepared. They also know it’s necessary to analyze previous years’ financials to fully understand the current statements.

Romney has noted that he isn’t a business, but to understand his full character, voters deserve full disclosure of prior tax returns. The last two years of taxes are window dressing. To get a true sense of the man’s financial values, we need to know how Romney operated before he knew everyone would be looking over his shoulder.

~ Jim

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