I’ve worked around minor league financial tycoons for most of my adult life, and the one common objective among them (from the honest progressive ones to the straight up rogues) is a quest to defer (not evade) income taxes. The reason is obvious. For every dollar I don’t have to pay this year in taxes is two dollars (using only 50% leverage) I can invest in my next deal. I have two dollars working, courtesy of Uncle Sam, instead of none. I will happily pay the tax years from now when I cash out the investment. So here, below, is how I read the letter from Price Waterhouse about Romney’s taxes.
I begin with the assumption that a partner at PWS would not lie, and that their letter does not contain an untrue statement.
The methods of tax deferrals for professional investors are everywhere in the tax code. Buying stock in a company that appreciates every year for 20 years is the most obvious. If you are a real estate investor, the Section 1031 deferral technique is available (more about that later for any one who cares.) The ones many of you out there use is the IRA. Invest pre-tax dollars today in your higher-income years and pay the taxes many years from now when you retire and start drawing out those dollars in your lower-income retirement years.
For every year that your investment appreciates, or that you contributed to your IRA, from an accounting standpoint, you owed taxes on the increase or the contributions, but you didn’t have to pay it. If an accountant prepared your financial statements for your banker, for example, you would not be allowed to claim the value of your investments without an offsetting liability for deferred income taxes, because to do otherwise would be deceptive. Is that what is going on with Mitt and PWC?
The whole “sworn letter from my accountant” is of course peculiar (unless you are merely trying to assure your potential partners in an investment that you have the weight to make the investment required) but the wording is far more peculiar. Why owed, not paid?
I think I know how Mitt jacked the value of his IRA from zero to over $100 million on 20 years or so, but the exact technique is not necessary to understand the attempted slight of hand he is trying here. Every year that the value of my IRA increases in value, I owed taxes on that increase, but I didn’t have to pay it. That is, the tax is deferred until I start cashing out of the IRA. Mitt could owe over $20 million on that IRA in federal income taxes and if you average that back over 20 years, you can say he owed at least $ 1 million a year in income taxes. Is that what the PWC letter says? I have no idea, but it could be saying that. This analysis also makes truthful the PWC representation that Romney has paid all taxes due.
The exact calculation of the percentage of taxes owed could be performed only by someone with full access to Mitt’s returns, so my analysis is largely speculation, approaching a theory.
I wake up every morning thinking “all of what I know could be wrong”, so I will not feel bad if a reader destroys this theory with a better understanding of the tax laws, so have at it.