The Internet Plays Detective With Mitt Romney’s 2009 Tax Rate
The awesomeness of the internet cannot be overstated. It’s not just a place for admiring vintage pornography and slandering people anonymously, it’s also a place where we can go to engage in wild speculationabout topicson which we have little to no information. It’s a beautiful thing: we can make baseless predictions on whether Peyton Manning will retire, pontificate on whether Sarah Palin’s had some work done, or devote a poll to questioning Daniel Tosh’s sexuality, and do it all without fear of reprisal.
Such is the foundation for this Wall Street Journal article, which attempts to take the sting out of the political firestorm surrounding Mitt Romney’s much-publicized 13.9% effective tax rate for 2010 by using Romney’s 2010 tax return to “back into” an estimated effective rate for 2009 of 19%; a rate that would likely be more palatable to the American voter.
In fairness, the analysis in the article is well thought-out, and probably pretty darn accurate. Unfortunately, that doesn’t make the task of guessing someone’s effective tax rate any less an exercise in futility.
Their theory goes like this:
- On their 2010 return, the Romney’s made estimated payments totaling only $1,369,000 before $3,250,000 was paid with extension. Since no underpayment of estimated tax penalty was assessed under I.R.C. § 6654 upon the filing of the return, the estimated payments were enough to “safe harbor” the Romney’s 2010 estimated tax based on 110% of their 2009 tax. This would put their 2009 tax liability at $1,240,000.
- In 2010, the Romney’s $17,000,000 of capital gains were partially offset by a $5,000,000 capital loss carryforward. This would mean that the Romney’s had no net capital gain in 2009, but rather a $3,000 capital loss, the maximum allowable under I.R.C. § 1211.
- Removing the capital gain from the Romney’s 2010 return and assuming items like interest, dividends, and speaking fees remained relatively constant from 2009 to 2010, the article puts their2009 AGI at approximately $6,500,000.
- Dividing the federal tax bill of $1,2400,000 by the assumed AGI of $6,500,000, the article concludes that the Romney’s effective rate in 2009 was 19%, a much more reasonable number for a man of such prodigious wealth.
The shortcoming of the article is not inits methodology, but rather in the meaningfulness of its conclusion.What is to be accomplished by pegging Romney’s tax rate at 19%? Truth be told, Romney’s widely reported 2010effective rate of 13.9%isn’teven particularlymeaningful – since it fails to take into consideration the corporate level tax paid by many of Romney’s investments, making his real effective ratelikely considerably higher— so why go through the exercise of guessingat Romney’s 2009 rate?
To illustrate, what if Romney’s 2009 AGIwas $8,000,000or $5,000,000 rather than the $6,400,000 posited in the article, a totally reasonable margin for error.This would put Romney’seffective rate at15.5% or 23% rather than 19%. Would it matter?It’shard to imagine a 4% reduction ina tax someone paid three years ago costing them votes, just as its equally unlikely thata 4% increase inthe sametax rate would calm concernsof financial inequity.
From my perspective, investing this much guesswork in Romney’s 2009 tax picture can only reinforce two things we should have already known:
1. Romney’s effective tax rate — like most Americans — varies from year to year.
2. The stock market really, really tanked in 2008 and 2009 for a private equity kingpin like Mitt Romney to have a net capital loss.
Perhaps this comment left on the Wall Street Journal website reacting to the article said it best, and using much more modern vernacular to boot:
“OMG, who cares…..”
