”Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.
-- Court of Appeals Judge Learned Hand, Helvering v. Gregory (1934)
By far the stalest of the few tired jokes about accountants, in its tax code version:
Client: How much is my taxable income this year?
Accountant: How much do you want it to be?
How should we feel, the fraternity concerned for the essential integrity of publicly-reported financial information, about presidential candidate Mitt Romney’s 2011 taxes?
In particular, what about his choice to under-declare $ 1.75 million in charitable donations, to avoid reducing his overall income tax rate below a previously-announced target of 13 percent?
The US Treasury is no doubt happy to accept Mitt and Ann’s resulting over-payment, and their gratuitous contribution to be mingled with the trillions extracted from the rest of the tax-compliant population. But under Judge Hand’s formulation, no added virtue accrues to their extra-generous support of the federal government’s activities.
The context for Judge Hand’s famous pronouncement was a controversy in which the substance of a tax avoidance scheme was held to prevail over the tax-payer’s argument that its form was strictly legal.
Substance over form: What is the reason? And the question follows: Does that reason pass a test for credibility?
The first anomaly arises because there is not a single number on a balance sheet or a tax return that is not subject to some degree of judgment – not to say, flexible up to and past the point of manipulation. The choices are never neutral – some interest is always served.
- An entire career ago, my very first securities fraud investigation involved a life insurance company that for years invented fictitious clients, thus falsely over-stating its liability to pay death benefits – a “fool-the-auditors” technique that appeared counter-intuitive, until exposed as a Ponzi scheme made possible through cash-generating fakery in its dealings with re-insurers.
- Similar motives explain the padding of employee rosters with ghost employees (e.g., ZZZZ Best, decades ago, and Satyam in India). Over-stating expenses for payroll, office space and supplies would be perverse, except to off-set the criminally systematic booking of fabricated contract revenue.
So is this a Romney head-fake? A smoke-screen of piety and beneficence behind which, like the Wizard behind the curtain, are concealed the off-shore accounts and the sheltered capital gains? Transparency and answers are both lacking, unrelieved by purported “summaries.”
But, giving benefit of the doubt to a vacuum of hard information, assume tax legitimacy. If the motivation lies elsewhere than in the Romney family’s taxes themselves, is there a political constituency to whom this tactic appeals?
- For the bulk of tax-payers at the population base, whose income tax obligations are withheld by employers at the source and whose deductions are standard, the entire Romney approach is incomprehensible noblesse oblige.
- For those a level higher on the income pyramid, enjoying some measure of return on their modestly accumulated capital savings, Romney’s ability to maneuver his tax rate between 11 % and 14 % is an advantageous opportunity only accessible to the Bain-enabled.
- For the one-percenters at the top, to whom tax minimization is an article of faith having theological dimensions, natural affinity for Romney’s otherwise sympathetic policies must be off-set by the appearance that, on his taxes at least, he is acting like a fool.
- And for Grover Norquist and those ideologically committed to opposing both growth in government and taxes on the wealthy – Romney himself having taken the pledge years ago – the foregone charitable deductions confirm Romney’s two separate acts of anathema: He has inflicted a tax increase directly on himself, and his resulting inflated payments only serve to grow the malign resources of a bigger federal government.
If tax policy, like charity, truly does begin at home, then those concerned about Romney’s consistency and true conservative colors had best be placing defensive calls to their own tax advisers.
Or – if I am missing something and there is anyone persuaded by his reasoning – please advise.
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