Re:Balance -- Jim Peterson

Mitt Romney Contributes to Bigger Government -- A Self-Imposed Personal Tax Increase

”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.

 

Thanks for joining this dialog. Please share with friends and colleagues. Comments are welcome, and subscription is easy and free, both at the Main page.   

Preserving and Re-Building Trust -- An Event Preview

On October 2, the Consortium for Trustworthy Organizations at Fordham University in New York sponsors “The Summit on Restoring Trust in Business,” on West 60^th Street in Manhattan. 

An A-list of participants from major companies and consultancies will be there. Those with professional or academic interest are invited – program details and enrolment information are here.

I have the pleasure of bringing my perspectives on risk management, litigation and disputes to a great panel, “Effective Trust Repair,” led by Charlie Green (for whom, see Trusted Advisor Associates and his blog, Trust Matters).

With the quality of gathered credentials and experience, the discussions will be seriously substantive – with more nuance and value than the sometime platitudinous slide-decks of the typical Trust-Building 101 curricula.  

Because a forum of this sophistication can dig far beyond the “easy stuff,” we expect to probe some of the conventional attitudes. Three such topics are sketched below -- in no more than the possible appetizer-sized portions.

“Trust Survival” May Be the Best There Is

Run-of-the-mill literature on trust in business strongly features its preservation and maintenance. But take note: when corporate times are rosy, the language of trust gets subsumed within the overall anodyne vocabulary of feel-good success. 

And after the fact of a disaster, it’s too late.

At the only time it truly matters – when an enterprise faces existential crisis –– continuity of trust is at best a problem of second-order importance. And the small circle making life-and-death decisions -- those directly reporting to the chairman or the CEO –- are the only people with real influence.

Examples:

• As Arthur Andersen spiraled into disintegration in 2002, it was the peeling away of partners, clients and its non-US firms – trust was implicated, to be sure, but at stake was the immediate impact on the firm’s very viability.

• At MF Global last fall, Jon Corzine would have cared less for the preservation of customer or counter-party trust, when what really mattered was a Hail Mary scramble for survival that turned into $ 1.6 billion in missing customer funds.

• And at Knight Capital over the weekend of last August 4-5, virtuous concerns for trustworthiness, following the $ 440 million loss inflicted by a trading software glitch the week before, would have been subordinated to the search for friendly rescuers – surrendering ownership to investors prepared to salvage the firm’s ability to open for business that Monday. 

Only if the enterprise survives, in other words, do the re-builders of trust have a chance at an invitation to the table.

And even then, trust-related advisors in a post-breakdown environment risk relegation to the same role as the medieval camp-followers after battle – executing the wounded and looting the corpses.     

“Trust Building” May Not Always Really Matter 

The constraints of a cartel or the impositions of regulation affect whether trust in business is relevant at all.

Nobody loves the indifferent service of the local cable company or the lock-step piracy of the neighborhood filling stations. But subscription and consumption continue.

As Michael Corleone was reminded by Frankie, the disaffected mob soldier in The Godfather II (1974), “Your father did business with Hyman Roth. Your father respected Hyman Roth. But your father never trusted Hyman Roth.”

Bond offerings require ratings, despite the agencies’ consistent behind-the-curve performance during times of crisis, from the savings-and-loans of the 1980’s to the subprime mortgage and sovereign debt calamities of this decade. Audit reports are required by law on the financial statements of public companies, despite manifest dissatisfaction with their content or their usefulness to readers.

The result in these contexts is narrowed relationships and skeptical doubts about value. Notions of “trust” are conspicuously absent from the dialog.    

“Trust Repair” May Be Non-Strategic 

Finally, when business trust is broken, and a supplicant comes around to plead for another chance, symmetry requires a response by those asked to re-affirm their faith. What conditions should apply? 

In other words, “fool me once…” – and then what?

Consider the frequency with which a large-scale fraudster gives early signals of his corruption – Bernie Madoff’s unbelievable golf scores evidenced his flim-flam. Or even confirms, like the recently re-jailed Barry Minkow of ZZZZ Best, the overwhelming rate of recidivism among white-collar criminals.

What combination of sentiment and compassion, or venality and credulity, blinds the risk processes of those charged as fiduciaries for their stakeholders, such that the victimizations continue?

Salience does enter in, of course. A single disappointing meal at a favorite restaurant should not kill its reputation, nor an explicable one-time lapse in service by a supplier or payment by a customer. Some tolerance is required, for the inevitable breakdowns that inhere in complex systems of human design.

But while repentance and forgiveness have their place in a caring society, prudent risk management counsels against re-admitting a known fox for a return visit to the henhouse.

These are among the complex issues, and they have no simple answers. Reactions here are invited and encouraged. And those able to extend the discussion in New York on October 2 are most welcome.

 

Thanks for joining this dialog. Please share with friends and colleagues. Comments are welcome, and subscription sign-up is easy and free, both at the Main page.