Only Mitt Romney Can Reform the Tax Code
Mitt Romney's dance of the seven veils with his tax returns probably isn't helping his presidential quest. Yet whatever happens Nov. 6, the slow reveal may end up performing a valuable public service by exposing hidden nooks and crannies of the U.S. tax code and could even lend momentum to a future overhaul.
A Bloomberg News article by Jesse Drucker this morning offers a fascinating glimpse of one of the tax-avoidance strategies that are available to high-net-worth individuals such as Romney. Drucker obtained previously unreported securities filings showing that in January 1999, a generation-skipping “intentionally defective grantor trust” Romney had set up for his children and grandchildren reaped a 1,000 percent return on the sale of shares in the Internet advertising company DoubleClick Inc. Because the shares were placed in this type of trust -- known to initiates as an "I Dig It" -- Romney was able to avoid paying gift or estate taxes, both of which carried rates of up to 55 percent in the 1990s.
All of this is perfectly legal. There is no reason to doubt Romney's assertion that he pays all the taxes he owes. No one should begrudge him his wealth or suggest he shouldn't do as he pleases with it.
It's legitimate to ask, however, whether the richest Americans, with their lawyers and accountants, should get an inside track in navigating the back streets and byways of the tax system while the vast majority of taxpayers are forced to take the toll roads.
Romney's campaign has reported the candidate's net worth as $250 million. That doesn't include assets worth $100 million that were moved into the tax-minimizing trust. These trusts are most effective when their founder endows them with unrealized assets such as shares in a company that hasn't yet gone public and whose real value only becomes apparent long after they are transferred.
In theory, such techniques are available to all Americans to pass on their wealth to their heirs and family. The trouble is that most people don't have the kind of assets that are worth very little when they are passed on and whose value jumps 1,000-fold by the time they are sold. Instead, most Americans' wealth is in their home, and they must pay the rate for gifts or estates, not the 15 percent for capital gains.
At best, this is confusing; at worse, it is unfair, and a tax system that is perceived as favoring one group over another will inevitably breed cynicism, anger and noncompliance.
And this is just one tiny area of opacity and confusion in the tax code that should be remedied. The debate over taxes that has been sparked by Romney's candidacy shouldn't be dropped after the election. In fact, if the Republican wins, he would be ideally placed to have a "Nixon in China" moment and make reforming the system from the inside one of the signature achievements of his administration.