Like most people who’ve looked at Romney’s return, I have to say: there’s nothing terribly interesting there.
Okay, let me walk that back: there’s a lot of hugely interesting things, if you’re interested in all the many ways a person can earn income, and all the many forms a taxpayer has to fill out when the taxpayer is broadly invested.[fn1] Still, there are a couple things that I thought I’d highlight:[fn2]
So How Much Did Romney Make in 2010?
Gross, it looks like he took in $22,213,866. But he did have some expenses associated with his income; taking those into account, he had $21,661,344 in adjusted gross income.
That doesn’t mean, though, that he brought home $21 million in cash, as we’ll see as we explore his tithing.
Is Romney a Full Tithepayer?
This seems to be the question of most interest to Mormons. The answer? Yes. I mean, I assume so, though it’s neither your nor my business. But his tax return doesn’t tell us.
What his return tells us is this: in 2010,[fn3] Romney donated $1,525,167 (in cash) to the Church. In addition, he donated stock with a fair market value of $1,458,807 to the Tyler Charitable Foundation, which appears to be a charitable foundation run by Romney. The Tyler Charitable Foundation, in turn, donated $145,000 to the Church. (It also made other donations, including to Boston charities, to Harvard and BYU, to an equestrian organization, to Deseret International, to the George W. Bush presidential library, etc.) So let’s say Romney donated $1,670,167 to the Church in 2010, out of $21 million in income. That comes out to 7.7%, which is less than 10-12%. So what gives?
It could be any number of things, from prepaying tithing to smoothing his tithing amount over multiple years. But there’s one possibility that fits very well with his major source of income, has to do with taxes, and hasn’t been mentioned as far as I know. And it’s this:
A lot of Romney’s money comes through investment partnerships (as carried interest or as a result of being a partner). The taxation of partnerships is complicated but, in a nutshell, partners are taxed as if they’d earned directly their share of partnership income. So, for example, let’s say you and I each own half of T&S LP, an investment partnership. Two years ago, T&S LP bought a share of BCC Inc. stock for $100. Today, T&S sells that stock for $200. As a result, I include $50 in my income this year (that is, half of the partnership’s gain). And I do this irrespective of whether T&S distributes the money to me. T&S can hold onto that money for another five years, reinvesting it or keeping it in a bank or under a mattress or whatever.[fn4]
Now, notwithstanding tax considerations, I doubt that I’d pay tithing on income I hadn’t yet received. Moreover, even if Romney does tithe his so-called distributive share before it is distributed to him, investment partnerships are often unable to let their partners know what the partners’ share of the income was until sometime after April of the following year. So Romney couldn’t know what some significant portion of his income in 2010 was until sometime mid-to-late 2011, far too late to pay tithing on it in 2010.
And How About That Super-Low Effective Rate?
In 2010, Romney paid an effective federal income tax rate of 13.9% of his adjusted gross income. That seems pretty low, especially given that Gingrich, with $3 million of adjusted gross income, paid federal income tax at an effective rate of 31.5% and Obama, with adjusted gross income of $1.7 million, paid federal income tax at an effective rate of 24%. So is Romney’s rate really low?
Yeah. I mean, many pay a lower rate, of course—a median-income family of four had an effective federal income tax rate of 4.7%, notwithstanding being in the 15% tax bracket. But that doesn’t tell us a lot about how much Romney should pay.
But let’s bracket the normative debate for now: how did Romney pay such a low effective rate? I mean, capital gains are taxed at 15%, so even if all of his adjusted gross income consisted of capital gains (which it didn’t), he shouldn’t be at 14%.
Charitable donations and other significant deductions. He donated about $3 million to charities, and had another $1 million or so of miscellaneous itemized deductions. We use these kinds of deductions to go from adjusted gross income to taxable income; he paid 16.8% of his taxable income in taxes, plus his tax was increased by $232,989 of alternative minimum tax.
Other Interesting Details
This is probably too long already, so just a couple more interesting details: in 2010, Romney was on the board of Marriott, and earned $113,881 in directors fees.
He has no Cayman bank account; he had a Swiss account in 2010, which he disclosed as he was required to do. Note that a U.S. taxpayer must pay taxes on her worldwide income; any interest Romney earned on his Swiss account is taxable to him at ordinary rates. The only reason such an account would be tax-advantageous to a U.S. taxpayer would be if that taxpayer was trying to hide money from the U.S. government. Romney didn’t, so I assume he had a business reason for having some money overseas.
Some portion of his income is from carried interest. There’s a big, long, fascinating debate over the appropriate way to tax carried interest. Right now, though, it’s treated as pass-through income, meaning if the partnership earns capital gain income, Romney gets to treat his carried interest as capital. If you want my long take on the carried interest debate, you can read it here.
Tax Policy Take-Aways
A couple that I want to highlight:
First, if the purpose of the charitable deduction is to encourage people to donate to charities, the deduction Romney received (and that I get, and that many of you get) is probably too generous. That is, he (and I and you) would be full tithepayers with or without a deduction.
Does that mean we should get rid of the charitable deduction, or get rid of it with regard to certain donations, or with regard to certain people? Not necessarily. First, although we talk about the charitable deduction as an incentive, that’s not the only justification for it—it may have purposes other than just encouraging people to donate to charity. Second, though Romney would probably have donated $1.5 million with or without a deduction, he may not have donated the other $1.5 million. And detangling what would have been donated from what wouldn’t have been donated may be administratively difficult, if not impossible.
Second, the same thing about preferential rates on capital gains. Romney probably wouldn’t have invested less if his capital gains rate were higher. (Why not? Because he’d still be getting a better return by investing it than he would by doing nothing.) In 1986, as a matter of fact, Reagan’s tax reform lowered the top ordinary rate to 28% while raising the rate on capital gains to 28%.
Again, that doesn’t mean the top capital rate should be raised to 35%. But it does highlight that there’s nothing True and Eternal about a lower rate of tax on capital gain.[fn5]
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[fn1] For example, Romney has a series of Form 8621s; he has to file one for every PFIC (that is, foreign corporation that earns mostly passive income) he owns, directly or through a partnership. One of those 8621s, for Centro Properties Group (which appears to be an Australian real estate investment company) reports that Romney suffered a $2 loss. $2 would practically be a rounding error for me, and yet Romney has to file a two-page form reporting that $2 loss. We go through them, and there’s a $7 loss, a $14 gain, a $71 gain, etc. Some are bigger-dollar; he has a couple that report $10,000 or $15,000 of gains or losses. But there are at least a dozen 8621s, most of which don’t report a gain or loss in excess of a couple hundred dollars.
[fn2] And realize that a lot of what I’ll say is speculative as regards Romney personally; I don’t have any personal knowledge of his finances.
[fn3] Like I said before, I’m only going to look at his 2010 taxes; his 2011 return is tentative, and the couple hundred pages of 2010 are enough for me to deal with.
[fn4] I should note that there is some balance: when T&S distributes the $50 to me, I don’t face any additional tax. That is, I only pay taxes when T&S realizes the income, not when I get my hands on the cash.
[fn5] It also suggests that eliminating taxes on capital gains may not be what we want to do. Romney on Gingrich’s tax proposal, which would eliminate capital gains taxes altogether: “Under [Gingrich’s] plan, I’d have paid no taxes in the last two years.”
Wow, Sam, so T&S owns a share of BCC? Does Steve Evans know?
Hey Sam!
I think you are right that there are probably a lot of reasons why hid church donations aren’t going to equal his income divided by 10, and really it’s none of anyone’s business.
I’m interested in your point about investment partnerships. Partners may not know until late in 2011 what their distributive share is from 2010, but wouldn’t they find out during 2010 what their 2009 distributive share was? If Romney was so inclined to pay tithing on his partnership earnings before they are distributed to him, wouldn’t the timing issue just bump his tithing payments back a year? So this would only explain a lower tithing payment if he earned less from his partnership interests in 2009. Is that right?
Is it also possible that there is a question here as to whether you tithe on your gross rather than on your net after taxes?
Nate, right. Note that he filed his returns on Oct. 15, 2011, the latest you can do it if you get an extension. Part of that is probably because of the complexity of filing a 203-page return, and part is probably because he didn’t get the K-1s from his investment partnerships until after the April 15 filing deadline. So if he’d wanted to pay taxes on his full distributive share from 2009, presumably he’d do it in 2010. But because he has primarily investment income, we have no way of knowing what his income would have been in 2009; it could easily have been less than 2010.
Kent, well, we did hypothetically own a share, but then we sold it for a pretty good return.
Sam, thanks for putting this together. As a tax attorney, I was curious about what we could learn from Romney’s returns (although I, too, expected it to be of little consequence), but I just knew someone else would actually take the time to put together a good summary.
Thanks, Sam. Fascinating. I learned that BCC is worth at least $100. ;-)
Interesting (and not surprising) to see various takes on Romney’s return in the press. Basically it confirmed what we all already knew: Romney is very wealthy and (apparently) honest in his tax dealings.
Thanks Sam. I was waiting for someone to explain all this in a way I could understand.
Thanks, everyone. I’m glad the post was helpful/interesting/something to you.
we have no way of knowing what his income would have been in 2009; it could easily have been less than 2010.
Partnerships in the “other financial investment activity” industry, which presumably covers Mitt, had an extraordinarily bad year in 2009–worse even than 2008. They passed through a net capital loss, in comparison to a wash in 2008 (and huge gains in 2007). The ordinary income they passed through was also only abut 3/4 what it had been in 2008 (and 3/5 what it had been in 2007). No data are available for 2010 yet, but it is hard to imagine that it was as bad.
Rounding off, we paid 15% in taxes last year. I think we’re lower middle income. What galled us is that our daughter-in-law, who worked for only a few months, received around $8000 in a tax refund. Clearly something is off in our tax system. The Today show reported around $42 million income, with $8 million donated to charity…..almost $4 million in tithing. I don’t remember the exact number, but they differ from your figures. I suppose it’s all relative.
I believe in capitalism. Maybe even crony capitalism. Heck. We are capitalists. Go Mitt.
annegb, the Today Show was combining his income from 2010 and his estimated income from 2011; I stuck with 2010 for reasons I link to in the OP.
As for your DIL, I don’t know, but it looks like she got the benefit of the EITC, which is basically a welfare program administered through the tax law. It can be abused, of course, but is considered one of the more efficient ways to assist low-income families, especially when we want to encourage them to work. And as for your effective rate of ~15%, I assume that includes payroll taxes and maybe state taxes? For purposes of this post, I’m taking those off the table; they are much more salient for lower- and middle-income Americans, though, than for high-income Americans (because a large portion of them is capped at about $108,000 of income).
Annegb objects to child tax credits or any refundable credits because she doesn’t qualify for anything although she would if she were still raising her family. Heaven forbid families like mine (6 people) not pay at the same rate as families of two. In fact, since we are six people maybe she’d like us to pay more than her. Lets charge $1000 taxes per person just for existing.
She also has a DIL who had taxes withheld from her paycheck so her refund is high. I don’t know what her DILs crimes are, but EIC, child tax credit, daycare credit, tuition credit, all seem like good ideas to help “lower middle income” people, unless we don’t want them to work, feed their kids, have daycare while they work, or go to school.
All the talk I’ve been reading around here about Romney’s taxes has got me thinking about whether mormons, in general, have a lower effective tax than the general population. I just finished my 1040 for 2011 and my effective federal income tax rate was well below the 15% that Romney paid and the reasons for that low rate are probably common to most mormon families and maybe less common to non-mormons. One of the main reasons for me was tithing. That’s an automatic 10%+ of my yearly income that I and most mormons get to deduct. Another reason is that I have a larger family than average which means I and many other mormon families get to claim more exemptions and more child tax credit than most families. A larger family also means more medical expenses which are also deductable. I also get to use mortgage interest and student loan interest paid to my advantage. This is common to mormons and non-mormons alike but I believe there may possibly be a higher percentage of mormons who attend college and own homes than the general population so that may favor mormons vs. non-mormons. Has anyone else given any thought to this?
DB, yeah, one might say that my husband pays way less in taxes than his non-Mormon cooworkers, few of which are married and few of which have ever had any kids up to their forties and fifties. My husband supports a wife and four kids. And paying for all of those medical premiums and the tax free medical flexible spending account that we put thousands into year after year sure saves “him” buckets of taxes.
Studies show that men who are married make more money than those who are not. Sometimes marriage can be a motivator. So if he hadn’t married, maybe he would not make as much money and pay less in taxes?
Of course if I wasn’t Mormon and I had never married him and just lived with a current boyfriend, I could claim head of household for me and my kids and pay far less in taxes. Can’t say what kind of non Mormon I would be. Whether I’d be a high powered childless career woman paying tons of taxes or an overworked, underpaid, single mom renting a dump with a loser boyfriend, or whether I’d be married with four kids and paying tithing to my local nondenominational Christian church with the exact same mortgage I’ve got now.
As jks illustrates, a straight comparison between Mormons and non-Mormons collectively is problematic for a number of reasons. But that never stops policymakers from plowing ahead, so why should it stop me?
Of course, the IRS does not collect data by religion, but it does collect data by state. If we just look at the average tax rate(tax liability/adjusted gross income) by state, Utah and Idaho were at the bottom in 2009 at 9.9% compared to a national average of 12.4%. But Connecticut, DC, and New York are at the top and the ones just above Utah are Mississippi, South Carolina, and Kentucky. That is just reflective of which states have the most people in the top tax brackets, so it doesn’t tell us much about religious practice. What if we only look at the highest income group–most of whom should be in the top tax bracket regardless of state? Utah is still near the bottom at 21.5%, compared to a national average of 22.9%. Vermont, Hawaii, Arkansas, and New Hampshire are lower. Idaho is below average, but not all that much. So I would conclude that Mormons probably do pay a lower than average tax rate even after controlling for income distribution. But there is clearly a lot more than tithing and large families going on here.
“Again, that doesn’t mean the top capital rate should be raised to 35%. But it does highlight that there’s nothing True and Eternal about a lower rate of tax on capital gain.”
I enjoyed reading this line, and I heartily approve!
Man, I for one think JKS should pay the same tax rate as me. Nobody asked you to have 4 kids. I also think I should be paying the same tax rate as I was a year ago when I was making half what I was making now.