Friday, August 10, 2012

Why Romney’s Effective Tax Rate Is NOT The Issue


The cry over Mitt Romney releasing his taxes prior to tax year 2010 has been a boon to political pundits of all kinds. Because of Mitt’s reticence, we have all imagined that his prior taxes are hiding a low or no tax rate that would be bad for his standing as a presidential candidate. It could possibly be illegal, or at least enter a grey area that is questionable. It has been interesting to watch, but the Dems have milked this enough.

Actually, I don’t think there is anything in his tax reforms that shows any quirky hanky-panky and I wouldn’t be surprised if he at least paid some level of taxes, maybe on the high side of single digit percentage of his income, but certainly not zero percent. But, there is something there that I don’t think he wants anyone to see and it isn’t his effective tax rate. I’m willing to bet any amount of money that the one thing he doesn’t want media and opponents to paw over is HOW he was able to keep the rates down.



Now, it is important to understand that the “How” is probably legal according to our current tax laws. But we need to remember that people of Romney’s level of wealth have an abundance of tricks up their sleeves that even the typical small business man or well-off professional don't have to reduce their tax level. 

Let’s think about this. If you are a home owner, then one of the biggest tax breaks the home owner receives is the mortgage interest deduction and reduction from property income taxes. Even people with modest homes get to itemize these deductions that possibly save the owner a few thousand dollars of taxation. At one time when houses were a lower portion of a person’s living wage, a home loan typically was 10 or 15 years years at low interest rates. Now, loans have scaled to where many people have $200,000 in home loans over 30 years and adjustable rates. Take a look at what this has done to the amount a home owner pays in interest:


In this example, a current home owner will pay over $230,000 during the thirty years of ownership. The good news is you can deduct this each year. The additional good news is that during the first part of the loan, the amount paid in interest is about $12,000 in the first year. It will decline over succeeding years, thankfully.

On this home owner’s taxes, that $12,000 is an itemized deduction that will save a person with a 20% effective rate about $2400 in taxes. This may be a little different because of the particulars in the itemized deductions and other deductions, but it should be close. Add a few thousand dollars of property taxes and the tax bite just got a whole lot shorter.

Why does this matter as far as Romney and his taxes? One of Romney’s stated goals is to reduce tax rates across the board by eliminating the ever-present “loopholes” that exist in the tax code. He has also stated that these tax rate reductions will be “revenue neutral”, meaning, the total amount of revenue from taxes won’t change and therefore won’t negatively impact the deficit. Oh, by the way, the mortgage interest deduction is clearly a “loophole” even if a goodly number of middle class people use the loophole.



Mitt hasn’t said what loopholes will be eliminated, but given that the mortgage deduction amounts to billions in tax relief for millions of home owners across the country, it will be a nugget that will be hard to ignore. If Romney is elected, I would plan on seeing this one phased out over time. To drop it completely would be a hardship on most and would guarantee a national outcry.

Mitt Romney and the other one-percenters (or .001 percenters like him) will lose this tax benefit also. They aren’t worried about that comparatively small loss of tax relief. While mega-millionaires have more lavish homes costing millions of dollars, this isn’t the loophole they are worried about. So, which loopholes are they worried about? Easy, the loopholes that Mitt Romney has in his taxes that he won’t release!

This may be the big secret. This is the information Romney does not want out. Yes, he has released ONE tax form from 2010 tax year and people have been combing all over it to find out how he has been avoiding tax payments. Ones that exist like the $100 million IRA that is using a portion of the tax code so limited, that one must be in a special situation - like Mitt - to use it. Can you imagine the special little prizes that are in the last five to ten years of tax returns? I would bet my last doughnut there are some real goodies in there. We already knows he put in a mega-million dollar company in a Roth IRA that is supposed to be limited to $5000/yr to allow withdraws tax-free. What else is there?

So Mitt will chase after the meaningful tax loopholes and reduce the rates which will keep the tax revenue about the same. But, do you REALLY think he and his tax cutting buddies in Congress will eliminate the ultra-tax loopholes designed for the very wealthy? Of course not, that would hurt the “job creators” and will not generate jobs (to use their particular parlance). He will be able to do this because unless you are a tax accountant or someone with a high income, you don’t know about these special tax features favoring them. Of course those that do know have no interest in revealing the tricks; they make a living on it after all. And, of course, the public won't see them unless the tax forms are released.

In the end, the tax code may be revenue neutral (possibly), but a lion’s share of the taxes will shift to the middle class. Too many will not realize the loss of their tax loophole will increase the tax burden while giving the wealthy a double benefit. The wealthy get a rate cut AND keep their loopholes.

This is truly a case of Romneyhood; he will take from the poor(er) and give to the rich. Worse, he’ll do it with a slight of hand manner by seemingly reducing tax rates. Get ready for the lie.




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