Here's how Mitt Romney might have paid no taxes

An income derived from capital gains is easier to manipulate for tax purposes.

By MSN Money Partner Aug 8, 2012 4:15PM

By Rick Newman

 

Did he or didn't he? This is the oddly intriguing question swirling around Mitt Romney as critics contend that he may have paid no income tax for some portion of the last 10 years.

 

Senate Majority Leader Harry Reid has become chief inquisitor in this weird populist trial, claiming that a "successful businessman" familiar with Romney's finances told him that the Republican presidential candidate paid no taxes for a decade. There's a McCarthyist air to Reid's charge--since there's no proof that it's true--yet it may also be politically effective, since Romney already struggles with an aristocratic, out-of-touch image.

 

If Romney has paid taxes, as he insists, he could clear up the whole controversy by simply releasing several years' worth of tax returns, beyond the 2010 return and the 2011 estimate he's already released. But he has refused, and there may be good reason for that. "I wouldn't be surprised if he paid nearly zero taxes in 2008 and 2009," says Brad Badertscher, an accounting professor at the University of Notre Dame. "It's going to look bad no matter what he does."

 

Theories about Romney's tax strategy tend to focus on offshore investment vehicles and secretive accounts, but basic investing and accounting scenarios could easily explain a low tax bill. The clue comes in Schedule D of his 2010 return, in which he claimed a $4.8 million loss carried over from prior years. That helped reduce his tax bill for 2010, in which he paid $3 million in taxes on $21.7 million of income, for an effective tax rate of 13.9 percent.

 

The carryover means that Romney probably claimed a much bigger loss a year or two earlier, which could easily have pushed his tax rate for 2008 or 2009 down to the low single digits. Most investors lost money in 2008, the year that Lehman Brothers collapsed and the S&P 500 stock index fell by 37 percent. Romney was probably no different.

 

During bad years, wealthy investors often use a legal strategy called "tax harvesting" in which they sell weak investments at a loss, which they can use to offset the tax they'd need to pay on gains from better-performing investments. The loss can be carried forward, to help lower the tax bill in later years when investments might have done better. "It's very common for sophisticated investors," says Badertscher. "It's a good time to clean out your portfolio, sell the losers, and use the losses for tax purposes." Romney has said that his investments are in a blind trust, so if his advisors made such moves, they may have done so without his input.

 

In 2010, all of Romney's income came from investments as capital gains, dividends and interest. He claimed no income from wages or salaries. So his maximum tax rate would have topped out at around 15 percent—the rate that applies to most investment income. The loss carryover, sizeable charitable donations and other deductions helped shave his effective rate to 13.9 percent.

 

About half of Romney's income in 2010 came from capital gains. If that were zeroed out in 2008, say, on account of the crumbling economy, it could have cut his income for that year to $10 million or less, with a huge deduction for a capital loss. Combined with the same sorts of charitable donations and other deductions he claimed in 2010, that could have pushed his tax burden close to zero. If Romney's losses were big enough in 2008, he could have carried a portion of the loss forward into 2009, helping lower his taxes then, too. The fact that the loss carryover appeared on his 2010 return suggests that may well have happened.

 

Romney, in response to Reid's claim, has insisted that he paid taxes every year, and paid "a lot of taxes" overall. If true, that means Romney never evaded taxes altogether. And it would be hard to fault Romney for abiding by a tax code that simply tends to favor wealthy investors like him. Still, a typical worker earning $50,000 faces a maximum tax rate of 25 percent, so Romney's tax rate could have been a fraction of what most middle-class earners pay. Nor do most workers employ complex strategies to whittle their tax rate down to single digits.

 

Reid may suspect that, and simply be baiting Romney because he knows the candidate has little to gain and plenty to lose by releasing further returns. Meanwhile, Romney the candidate wants to eliminate taxes on all types of investment income for middle-class families, which might be a pre-emptive way of saying that the tax advantages he enjoys should be extended to all taxpayers.

 

President Obama wants to do the opposite. He has proposed raising the tax on capital gains from 15 percent to 20 percent, and treating dividend and interest income the same as earned income, subject to whatever bracket the taxpayer happens to be in. If more of Romney's tax returns do become public, they might have the unintended effect of advancing his opponent's tax plan.

 

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

 

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468Comments
Aug 10, 2012 2:24PM
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No one... literally no one... intentionally pays more taxes than they have to.  So this criticism of Romney appeals to only those people who are abysmally ignorant.  They are condemning Romney for doing what they themselves have done or would do in his position.  But most of them are so stupid they don't even realize it.  in other words, they are the typical Democratic voter.
Aug 10, 2012 2:23PM
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why is it that when ever effort to improve the economy was blocked by the republicans no one say nothing even when they said that they would make him a one term president and the only way they could do that is stop him from helping everyone out and if continuing the bush tax cuts for the wealthy will help us to gain employment what’s stopping that from occurring now no one is stopping employment but the one who can hire, if people have a job they make money they go spend the money which creates more jobs so how is Obama stopping this from happening

Aug 10, 2012 2:10PM
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I am not sure if he did or if he did not, but all the accusers (such as Pelosi and Reed) should step up to the plate and show how much taxes they have paid, or should I say Manipulated to not pay taxes in the past 10 years.  People who live in glass houses should not throw stones.  I am a registered Democrat so please don't anyone think I am being bias.
Aug 10, 2012 1:56PM
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Why does he have to release his taxes?

Simple, because over the last 2 years the GOP have made taxes the centerpiece of their argument. Republicans have screamed about 50% of Americans not paying taxes and accused liberals of perpetuating this policy.

So, because conservatives have spent SO MUCH time crying about taxes, it is natural that people now want to see the taxes of THEIR CANDIDATE. People want to see if conservatives practice what they preach, or if they are simply hypocrites.
Aug 10, 2012 1:42PM
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You know I really get tired of liberals lecturing everyone about how "oh the rich dont pay enough in taxes,dont pay their fair share".   Baloney,they do.  The top wage earners in this country pay nearly 90% of the taxes,and yet Obama wants to penalize them more for their hard work?   Obama does not know what hard work is,he is simply an amateur.  Mitt ran the winter Olympics in Salt Lake in 2002 and was successful at that,as well as at Bain Capital.    Yet Prince Harry lectures us about how Romney has not paid any taxes for 10 years,quote"according to someone that worked at Bain Capital at one point"..  The fact of the matter is he has NO,yes no,evidence of Mitt not paying taxes for 10 years.   You liberals lecture Conservatives about how we rob the poor,but take a look at your own president right now,what has he done?  The same thing he lectures everyone else not to do.

Obama also said recently,in case the libs have forgotten,about how people havent built their businesses,that government had a hand in that.  What an outright lie,and it shows how low Democrats are willing to go to mislead people.   There are more people on welfare,less jobs,higher unemployment since Obama took office.   Yet he lectures America about civility even after the insensitive,hypocritical ads he puts out?   He knows absolutely nothing about what civility means,nor does he really appreciate the private sector since he constantly is attacking them.    I agree with jcb,this is just a bunch of garbage that the liberal media likes to put out.   In other words,what Conservatives are saying(yes we are a lot smarter than liberals think)is keep government out of our business,dont tell people what they can and cant do when they can govern themselves,and cut spending,as well as kick out all the illegals.  Simple as that.    16 trillion in debt?  Sorry Obama,you cant run on that and get away with it.

Aug 10, 2012 1:36PM
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Romney says that he has no control over his investments--that they are in a blind trust and on a video tape is Romney when asked about blind trusts--"they are just a ruse".  So there you have it.  How many ways can you say that he is a liar, even by his own words.
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did everyone for get that bush did the country in then left it for the next guy? shows that not everyone looks to reason just color

Aug 10, 2012 1:30PM
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why would I not want a president that worked hard and created his own wealth.  I don't agree with Mr. Romney on several issues, but it blows my mind that people say that because someone is rich they don't have anything in common with the middle or lower class.  Mr. Romney didn't start out rich he earned his.  Until the last 3.5 years I always thought that was called living the American Dream.  With our current president living the American Dream is sticking your hand out for the government to take care of me.  SaDDDDDDDDDDDDDDD
Aug 10, 2012 1:22PM
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I don't  speak for every middle class taxpayer, but I personally have had enough of paying higher taxes each year to accommodate for the less taxes that guys like Romney have to pay. And he has the guts to run for office so that he can rub the higher tax brackets in the budgets of the hard working middle class for as long as possible? For every dollar we, the middle class, pay in higher taxes, the richer it makes people like Romney. I realize that there are people out there that don't agree with me, but honestly.....For those who disagree, have you sat on the same side of the financial fence that I and other hard working middle class taxpayers have been sitting on?
Aug 10, 2012 1:20PM
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look up the 2009 unemployment rate.  Bush left a less than 5% rate when he left office.  After a few months of Obama's war on business the rate starts going up.  It has been up ever since.  Look it up and you will see the steady increase after Obama is in office.
Aug 10, 2012 1:19PM
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I used to be a poor democrat who believed all the BS liberals regurgitated. I was one of them. I'm still poor but no longer can tolerate the BS.  I hope Romney made twice as much money as his attackers accuse him of making. It gives me hope. If you hate people that make money due to their hard work and ingenuity, you are most likely someone who wants something for nothing. You are most likely someone who has never been TRULY responsible for the well being of others... just a lot of lip service on how much you care. ( mmwhah mmwhah).  You most likely would join some form of a Nanny Police in hopes of dictating how others should live their lives. I get nauseous thinking of how much time was wasted living in such a vacuous wasteland. One more thing. Could MSN be any more obvious in their liberal bias reporting.  MSN should stand for More Slanted News.   

Aug 10, 2012 1:14PM
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Typical liberal MSN garbage.  Good idea tax my capital gains higher, since I paid tax on it when I earned the damn money to begin with.  If this loser in DC gets another 4 years, we are heading for the abyss, which is right around the corner and we have a drunk driver driving the car called America.  4.3 trillion added in debt in 3.5 years, this will be the noose that we all will hang with.   
Aug 10, 2012 1:00PM
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Here's how Mike Tyson could have beat Buster Douglas, Here's how the guy should have cut the tree down so it did not fall on his house, Here's how the person could have got to the bathroom sooner so they wouldn't have messed themselves. I can not believe I wasted part of my life on what if's? &  how could haves?
Aug 10, 2012 12:59PM
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This is a Democrat site, Most will disagree with you no matter if you're right, i would start getting scared if I was a Democrat, cause you life is about to get better and your kid will live a happier life in the future come November
Aug 10, 2012 12:57PM
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I don't often agree with Romney but this is one time that he is absolutely right.  First, why does he have to release his tax info?  We already know he made money and ultimently it would have nothing to do with his serving as President.  Equally specious is the call to release the Presidents college transcripts.  We persist in making Political races as degrading as possible and then we complain about the quality of the people that want to go through that gauntlet.  No wonder we end up with the quality of politicians we do.  They have to be part Hilton and Kardashian to want to expose themselves like we ask them to. 

Secondly, Capital Gains should NOT be taxed at a high rate.  That is money that was taxed the first time it was earned and should not be subject to additional high taxation (to say no taxation would be debatable).  It is a way to encourage people to invest instead of blowing it on a Chinese TV just as the Mortgage deduction is supposed to encourage home ownership.  To tax the money twice would be - as the President likes to say - "unfair".   

Aug 10, 2012 12:51PM
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" MIGHT " have paid no taxes ?  Perhaps R. Newman could write an interesting article about how approximately half the U.S. definately pays no taxes. What kind of manipulation are they using??

Aug 10, 2012 12:45PM
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Okay why are we sitting here worried about if someone paid taxes or not, hell I think Romney would have had paid his taxes to avoid prison time and fines. This man isn't stupid; he just took what was given to him by our tax system; I would do the same. What about all the "Illegal Aliens" in this country that pay no taxes, use free medical and work under the table to send his/her money back home to support their families back in Mexico or Asia, don't you think that hurts this country by making money, not spending here and letting the tax payers absorb the cost for their Medical?

The real subjects should be- UNEMPLOYMENT, ECONOMY, and DEFICIT. Those are the subjects that will fix the USA, and stop us from falling in a deep depression Obama has no record of accomplishment in fours years except he raised the Deficit by 5 trillion in less than 4 yrs, the unemployment went up to 8.5% and has yet to fall below 8% and the economy is in poor shape. I don’t think I can give Obama a chance at another four years based on his record. If he was a great president and heading us into the right direction then yes I would vote for him, but I’m not voting just because he is Democrat. You see most people vote for all the wrong reason when they should think long and hard before picking someone. Good Luck in the future with your Kids and Grandkids, because if we move in the wrong direction for another four years you will not be able to buy the toilet paper that wipes you butt ever day and it almost that way now.

Aug 10, 2012 12:31PM
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Concerning taxes, whatever Romney paid or didn't was tax money owed from his labor. I'm much more concerned about the tax money given away by the president to cronies and political allies such as SOLYNDRA and his failed pork barrel stimulus. No regard about our tax money or where it came from. Romney shows me that by utilizing the tax codes legally he most likely will utilize my tax dollars to maximum benefit for the country and get the country's credit rating back up.

Aug 10, 2012 11:25AM
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President Obama is the only U.S. President to have publicly release his birth certificate. Contrary to what some are saying Senator McCain never publicly released his birth certificate.
 
You ask about President Obama's college records and transcripts, but I have yet to hear of Romney having released his college records and transcripts. In fact, I read that no President has ever authorized released of their college records(President Bush's were released against his will by someone who was not authorized to do so, there have been other unauthorized releases). Do you know of a website for Romney's college records or those of any of first 42 U.S. Presidents?
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Obama has released 12 years of his federal tax returns. Why can't Romney do the same? We already know Romney is worth at least 200 million dollars, that he has accounts in the Cayman Islands and that he had a Swiss bank account. So how could releasing his federal tax returns possible hurt him unless he is trying to keep something from the voters? As a voter and a tax payer I want to know!

Aug 10, 2012 10:50AM
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that means Romney never evaded taxes altogether. And it would be hard to fault Romney for abiding by a tax code that simply tends to favor wealthy investors like him. Still, a typical worker earning $50,000 faces a maximum tax rate of 25 percent, so Romney's tax rate could have been a fraction of what most middle-class earners pay. Nor do most workers employ complex strategies

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