New Thoughts About What's Hiding in Romney's Tax Returns

Bloomberg Businessweek's Joshua Green is not alone in surmising that, if Mitt Romney is so insistent he won't release his tax returns, they must contain something so damaging that he's better off taking heat for not releasing them. Green has a theory: Romney didn't pay any federal income tax in 2009.

As a member of the ultra-rich, Romney probably wasn’t spared major losses. And it’s possible that he suffered a large enough capital loss that, carried forward and coupled with his various offshore tax havens, he wound up paying no U.S. federal taxes at all in 2009. If true, this would be politically deadly for him. Even assuming that his return was thoroughly clean and legal — a safe assumption, it seems to me — the fallout would dwarf the controversy that attended the news that Romney had paid a tax rate of only 14 percent in 2010 and estimated he’d pay a similar rate in 2011.

In fact, Romney did carry forward a capital loss from 2009 into 2010, so we know he had no taxable capital gains in 2009. But big capital losses alone wouldn't be enough to save Romney from paying any tax.

That's because we know that, in 2010, Romney had about $9 million in 2010 income other than capital gains: interest, dividends, speaking fees and the like. It's unlikely that things were radically different the year before. You can't offset these types of income with capital losses, so Romney would need some other strategy to avoid tax on these kinds of income.

We do know that Romney has at least one source of negative ordinary income: a family trust that reported non-passive losses in 2010. It's possible that this trust also lost money in 2009, and that those losses went to offset Romney's income from interest and dividends.

As NYU tax law professor Daniel Shaviro notes, we have reason to believe Romney's trusts are using strategies that aim to produce tax losses. But the 2010 loss was less than $300,000; in order to get Romney's taxable income down to zero, it would have to have been much larger in 2009.

Then there is the issue of deductions. Romney made about $3 million in charitable donations in 2010. Similarly large donations in a year when his income was beaten up due to capital losses would have meant very large writeoffs. The deduction for charitable donations is capped at 50 percent of gross income, and we know Romney did not hit that cap, as he did not carry forward any non-deductible amounts to his 2010 return. But Romney could have taken other deductions, such as for state and local tax paid, on top of his charitable deduction.

And we have reason to believe that Romney paid a whole lot of state income taxes in 2009. That's because he took a state income refund of over $400,000 in 2010. Since Massachusetts has a flat, 5.3 percent state income tax, that suggests Romney made enough estimated payments to cover state tax on $8 million more in income than he was actually taxed on in 2009.

All told, these are signs that Romney's 2009 return reflected much less taxable income -- and much less federal tax paid -- than in 2010. Still, it's unlikely that these factors alone could have added up to a tax bill of $0. Of the 35,000 high income taxpayers with no tax due in 2009, by far the largest share achieved that feat by investing heavily in tax-exempt municipal bonds. We know that, at least in 2010, Romney had almost zero income from tax-free munis.

Matt Yglesias has another theory about what Romney is hiding: that he hadn't always been disclosing the Swiss bank account that's mentioned in his 2010 return. In 2009, the IRS offered an amnesty to taxpayers who had been hiding Swiss accounts: basically, disclose and pay what you owe now, and we won't try to send you to jail. Yglesias wonders if Romney took that deal.

The main problem with this theory is that Romney appears to have listed the account on his Federal Election Commission financial disclosure statement back in 2007, the last time he was running for president. You can see "UBS Money Market Account" on the third page; ABC News notes the account wasn't clearly flagged as Swiss, but it's there. It's possible that Romney told the FEC about the account while hiding it from the IRS, but that doesn't seem very smart.

Still, I suspect there is something in the missing tax returns that the public would strongly dislike. If all we would learn from more years of tax returns is that Mitt Romney is a rich guy who earns lots of income that is taxed at 15 percent, it's hard to believe he wouldn't just release them and get it over with. My bet is on aggressive tax planning strategies that are legally, but not politically, defensible.

(Josh Barro is lead writer for the Ticker. Follow him on Twitter.)

Read more breaking commentary from Josh Barro and other Bloomberg View columnists and editors at the Ticker.

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