Lessons from Mitt Romney's 203-page tax return

Mitt Romney's tax records show that he paid a tax rate of roughly 14 percent on his 2010 and 2011 income.

COMMENTARY I just finished reading all 203 pages of Mitt Romney's tax return. But it took less than 50 pages to realize that the return illustrates everything that's wrong with the U.S. tax system.

And I'm not talking about the headlines that you've read everywhere else -- that Romney paid a roughly 14 percent tax on the $42.6 million he earned in the past two years. I'm not even going to quibble with the fact that the 14 percent reported rate is wrong. A deep dive into Romney's return finds that Romney's gross income was actually $27,283,915 in 2010, making his tax of $2,979,346 equivalent to just 11 percent of income.

The real problems are illustrated in the details of the voluminous filing. That includes the fact that Romney needed to file a 203-page return to comply with the nation's Byzantine tax laws, which create inaccuracies like the 14 percent versus 11 percent rate. You see, "income" is defined in multiple ways in different parts of the tax code, leaving us all to wonder whether the GOP's sometimes front-running candidate earned $21 million, $26 million, or $27 million. Because all three of these figures appear on different lines of his return, that would appear to raise the same question: How much did you really earn?

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The broader problem that Romney's return illustrates cannot be addressed by President Obama's disingenuous "Buffett-rule" sound-bite. Legislating that high-income filers, much of whose wealth derives from investments, pay at least as much as wage-earners is ludicrous in a day in age when less than half of all wage-earning Americans pay any income tax at all. Yes, I'll say it again: Roughly half of the country pays no income tax. You cannot give these people a tax cut, as pandering politicians frequently claim they want to do. You can only give them a subsidy. They pay no federal income taxes. Zip. Zilch. Nada.

It is only the hapless middle-class that is considered too rich to be exempted from paying for our roads, courts, schools, and military, and yet too poor to participate in the vast array of tax loopholes that now benefit the super-rich.

Ironically, it's those same middle-class taxpayers who are also slammed by the Alternative Minimum Tax, a separate, parallel tax system in which the government computes your tax obligations under yet another complex set of rules. The AMT was designed to make sure that stupendously wealthy families, like the Romneys, paid their fair share. And yet the same alternative system that would demand that a person earning $270,000 pay at least 26 percent of their income in tax delivers only a glancing blow to someone earning 10 times as much. Romney's tax bill would have been $2.9 million, but the AMT added nearly $233,000 to his bill. Foreign tax credits subtracted some $129,000 from the total, leaving us with the final tally of $2.9 million.

How does Romney's return show us what is wrong with the tax system? Start with the vast length of his return. It also includes dozens upon dozens of pages where he must report such insignificant amounts of income that it clearly had to cost more to prepare the form than to pay tax on it. A few cases in point:

-- On page 48, a complex calculation determined he should add $14 to his taxable income

-- On page 69, he reported a $2 taxable dividend payment

-- On page 77, he claimed a $1 tax credit

Meanwhile, Romney needed to file separate schedules for "passive" income, "straddle" income, income from partnerships, capital gains and, of course, losses.

To be sure, most ordinary Americans have far fewer sources of income. But if you sold a baseball card on eBay, you'd need to do much the same as Romney, calling out this unusual source of income and paying a tax rate that's neither your ordinary income tax rate, nor a capital gains rate, but rather a rate designed solely for income of that type.

Why do we tax different types of income at different rates, when the money spends the same? When it comes to capital gains, the answer is simple: Investment income is essentially already taxed. You paid tax when you earned the income that you then invested. And if you earned this income through dividends paid by a corporation, the corporation also paid tax. The effective tax rate on the original dollar earned is arguably far higher than it would be on ordinary income.

But when it comes to taxes paid on collectibles, passive income and straddles, the arguments are far less clear. In reality, this is Congress flexing its social-engineering muscles, creating economic incentives to earn money one way (by investing in stocks) so you won't be penalized when you earn money another way (by investing in collectibles).

In the end, Romney's return underscores how far we've gone from the simple tax system the nation started with in the 1900s and imposed a flat rate on anyone earning over a set amount. 

A tax code that produces a 203-page return is too complex to administer; too complex to comply with; and so complex that it creates inadvertent inequities that encourage gaming the system in ways that are detrimental to our society and national character.

It's time to do away with the 72,536-page U.S. tax code and write our tax law on a single sheet of paper.

Here's my proposal:

Everyone should pay something -- even if it's a token amount -- simply to acknowledge that we all should be pitching in to maintain a society.

Tax rates should be graduated, starting at 1 percent and rising percent for every $10,000 you earn, capped at a 25 percent rate. That would mean that someone earning $50,000 would pay 5 percent in tax; you'd pay 10 percent at $100,000; and 25 percent at $250,000 and above.

All deductions would be eliminated because most of us would pay far less in tax with this graduated system --  even after accounting for the copious deductions you may be able to claim under today's law. Meanwhile, you could toss away the TurboTax and keep your tax records in your wallet. No one would have to file a 203-page tax return ever again.

[xvolunteerfireman]

So what happened to the copy of Romney's 2003 tax return that used to be on here CBS?

[TrueAmerican22]

Kathy Kristof is either retarded or deliberately dishonest. The poor pay a far larger percentage of their income in taxes than do the rich. That they do not pay a federal income tax is not the point. The poor pay sales taxes and payroll taxes and many other kinds of tax, including gasoline tax, SS tax, etc, that takes a much larger bite out of their meager income than it does of a wealthy man. The poor are burdened with taxes because the majority of what they spend is for survival. Mitt Romney does not suffer much to pay the tax on one of his wife's two Cadillacs, but the poor, and the middle class especially, get slammed very hard to pay for Mitt and Anne Romney's many tax breaks.

[kathykristof]

Rates always spur debate, but what about complexity? Our current code means that two people earning exactly the same amount often pay vastly different amounts. How does that make sense?

Even the nation's Taxpayer Advocate -- a government position aimed at watching over the IRS on behalf of taxpayers -- considers complexity to be our biggest hurdle. It makes compliance difficult and enforcement even more so. The only beneficiaries of the current code are tax preparers and legislators, who are able to pander to donors by giving them special loopholes -- the equivalent of money in their pockets.

[the_ralphster007]

Complexity is a huge issue. It is the only reason I haven't started investing outside of my IRA. I don't want to have to deal with all the different types of taxes and incomes, then miss one and have to hear from the IRS.

It isn't an accident at this point in time, though. It has to be intentional, the biggest reason being power. How many others limit what they do because of the IRS or are afraid of getting something they have done wrong when reporting it? The people now fear the government.

[Osprey4]

But Kathy, without complexity, how could our elected representatives use the tax code to help politically connected friends?

[kathykristof]

Oh, and Janine, I'm sorry...the difference came out in the rounding. You're right....it looked the same in the story, but there's

[kathykristof]

Ellie, the poor do pay sales tax, but they get back their Social Security and Medicare contributions -- and then some -- through the Earned Income Tax Credit.
On the other hand, Ralphster, the rich simply don't have to spend as much of their income on basics like food and shelter, so they can afford to pay more. Is it fair? Arguably the poor use as much or more public services than the rich, but the rich make their society better by providing a way for the poor to improve their lot in life by paying taxes.
My guess, however, is that we would all be a little less offended by the taxes we pay if the government showed a little more restraint when throwing around our tax dollars.

[elliesamericana]

Kathy, the EIC is what they get for doing these low wage jobs the rest of us will not do. Most of them deserve medals for just showing up. Most lower ranking enlisted service folks and some officers get the EIC. Bottom line, they make so little they cannot be taxed. I know this as I was a Volunteer Income Tax Assister for 20 years. The rich simply are not paying their fair share. It is our patriotic duty to pay taxes. The Greatest Generation did not grouse about their taxes during WWII and we currently have the lowest tax rates in the world. Our rich get to keep more money legally than any other upper class in the world. If this money came back to fund our government and/or better society it would be fine, but it does not--they simply fill up their coffers. I think 6 members of the Walton family have more money than the lower 30% of Americans. Before the income tax, we had the robber barrons of the 19th & early 20th century. They had so much money, they spent it on things like the Biltmore Estate and other opulent consumption while the America they made this money from remained impoverished. With our current income disparities, coupled with a tax code that enables it, we are on the same economic suicide course with the few rich at the top and the rest of us losing ground in society. Respectfully, retired US Army Medical Officer.

[the_ralphster007]

What anyone can afford is irrelevant and subjective. I think you can afford to pay more. I'm sure you can downsize if you don't think you can afford it. Does that mean you should be forced to do it? If the "rich" decide to start spending all their income on big houses and expensive food, do they then get to pay less? Who gets to decide?

Is it fair that people can work and eventually buy nice houses? Yes. Would it be fair if the government allowed only certain people to buy big houses? No.

The government forces us to pay taxes. We should all be treated equally under the law. Taking from some but not from others to pay for something everyone receives is the definition of inequality and unfairness, especially since nobody has a choice. The only fair way to collect taxes is to make everyone's rate equal.

[the_ralphster007]

Yes, the current tax code is completely outrageous and everyone should pay something, but a graduated rate system is not the solution. Why should people who have worked longer, harder, and/or smarter than others have to pay a higher percentage of their income? If I create something that improves millions of lives, I'll have to fork over 25%. But the person that shows up to a job and plays on Facebook for 35 hours per week only has to pay 2% (and still has access to all available services)? That is ridiculous.

A low flat tax is the only way to go. The lower the rate, the better.

[elliesamericana]

I don't know who pays 2%, other than Romney. With a net worth of $250 million, $47 million in income, and taxes paid of $2.9 million, he pays ~2% in relation to total net worth--and that is what most super-rich pay. The rich need to pay their fair share as they soak up all this money from the opportunities this country gives them, opportunities the rest of us do not have. They make money off the backs of the rest of us, so it is fair that they have a higher tax rate. Kudos to Warren Buffet for bringing this inequity to light by pointing out his tax rate is half that of his salaried secretary. We cannot begrudge the rich for simply being rich, but we can begrudge their slipping thru the cracks when it comes to paying their fair share of taxes. Respectfully, retired US Army Medical Officer.

[azyat]

And you'd still have at least $167,900 more than Facebook Joe.

Even with a low flat tax, he'll still be paying less than you while having access to all available services, that of which, may have to be cut back or eliminated with a low flat tax as the government would most likely see a drop in revenue. Who would get hurt by those cuts the most? The lower and middle class who earn less money to begin with.

[PGG1]

We need to stop obsessing over what everyone pays in taxes. Yes, it needs to all change. Yes, we need to close loopholes for the rich. Yes, everyone should pay at least a little something. But we're losing sight of what taxes are. They're not penalties so we can say, "Aha! Take that rich person!" They're something that unfortunately we need to pay to fund our government. Take it in that context, rather than in the context of scouring through hundreds of pages of documents to try to generate a splashy headline that makes people mad at someone else (not saying that's the case in this article...this is actually one of the better tax articles I've read over the last couple of weeks).

People who are asking for the 40% to pay something, or the rich to pay more...they're not saying that because they really believe that if the government just had more of our money, all of our problems would be solved. Clearly that's not the case. As such, we're losing sight of the bigger picture in favor of arguing over how we can penalize everyone equally to make things "fair."

Again, I'm in full agreement that massive changes need to be made, but let's take a step back and not think about this in terms of revenge and individual cases of tarring and feathering. What's the point of people paying more if it's being paid into a broken system and being spent into oblivion?

[occupy_cbs]

"Biden sees no difference between Gingrich and Romney"



Neither does the electorate these days, with negative views of willard almost catching the highly-negative views of the newt.

A new Washington Post/ABC News poll shows that negative views of Romney have "spiked" over the past two weeks, from a net +4 favorability rating (39 positive/34 negative) to a -18 rating (31 positive/49 negative) -- very similar to Gingrich's -22 rating (29/51).

http://www.washingtonpost.com/wp-srv/politics/polls/postabcpoll_012212.html

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The shift is most notable among independents, who went from generally liking Romney (41/34) to disliking him by a 2-to-1 margin (23/51). Democrats (21/62) and Republicans (58/32) have soured on Mitt, too. What's behind Romney's newfound unpopularity? Here, seven theories:

1.) Voters are turned off by his wealth
2.) And he's cagey about his fortune
3.) Romney has alienated Reagan Democrats
4.) Being a venture capitalist turned out to be a liability
5.) The inevitability gambit backfired
6.) He can't handle his rivals' attacks
7.) Going negative hurt him

[Janine0204]

Help me here. You wrote, "Romney's tax bill would have been $2.9 million, but the AMT added nearly $233,000 to his bill. Foreign tax credits subtracted some $129,000 from the total, leaving us with the final tally of $2.9 million." It appears to me -- not that this detracts at all from your main points -- that $233K was added and $129K subtracted to come right back to $2.9 million.

[ibsage]

tax consumption instead of income.

[elliesamericana]

Again, not a fair tax. The rich do not spend much money consuming in relation to their wealth. Many have tax bills of only 1-2% in relation to their total wealth. Romney is a good example--worth $250 million, taxes paid $3 million. To right society, we must raise their tax rates. Respectfully, retired US Army Medical Officer.