Lessons from Mitt Romney's 203-page tax return

Mitt Romney released his tax records from 2010 and 2011, and the returns confirm what everyone knows: Romney is rich and federal taxes are complicated. Jan Crawford speaks with NY tax attorney Alan Dluglash to sort out the details of Romney's complex returns.

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.

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