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]
[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.”