Mitt Romney is Not a Tax Idiot

by Mario Rizzo

Let us begin with a famous quotation from Judge Learned Hand in a decision affirmed by the Supreme Court:

Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.

Gregory v. Helvering 69 F.2d 809, 810 (2d Cir. 1934), aff’d, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935)

Quite simply, I am really tired of hearing about Mitt Romney’s tax returns. Does Team Obama really want us to believe that if Mitt Romney took advantage of every legal option to lower his tax bill that he is somehow bad, out of touch with the majority of Americans, or unpatriotic (whatever that is supposed to mean)?

One of the worst “loopholes” from the point of view of economic efficiency and the revenue consequences is the mortgage tax deduction. This is the staple of middle-America and the American dream! And then there is the non-taxation of employer-provided health insurance, another highly distortive “loophole” and source of many problems in the healthcare market.

I am in no way arguing that the tax burden on middle-class Americans be increased. But I am saying that the two “loopholes” that do much of the damage to our economy are the ones that the many, many people take in their own interests. We do not begrudge them that, given that the tax law is what it is.

Suppose a friend of yours were to tell you that he is not taking the mortgage-tax deduction even though he entitled to it. Further, he is paying more tax than he owes (as he is explicitly allowed to pay down the national debt) as an offset to his employer-sponsored health insurance tax exclusion. What would you say to him? Most would say, “idiot.”

So I hope Mitt Romney has not been a tax idiot. I would not respect a candidate who was. Of course, he may be doing himself political damage. That is a separate issue derived from the fact that Team Obama knows much about the ease with which a good chunk of the American people can be diverted from thinking about the state of economy.

22 thoughts on “Mitt Romney is Not a Tax Idiot

  1. “Does Team Obama really want us to believe that if Mitt Romney took advantage of every legal option to lower his tax bill that he is somehow bad…”

    Yes, I think that is exactly the message that team Obama wants to send. Because socialists believe in a world of limited wealth, Romney could not have achieved his wealth except at the expense of others. So being rich makes Romney evil by definition; Obama is wealthy, too, but since is a socialist he is good in spite of it.

    At the same time, socialists believe that the system is skewed in favor of the wealthy, in spite of progressive taxation on individual income and double taxation on dividends. Wealthy people like Romney created the unfair system from which they benefit.

    That pretty much sums up the economics of most Democrats I talk to or read.

  2. There’s a world of difference between the tax rate someone ought to pay and the tax rate someone does pay due to tax avoidance and the taxes someone does not pay due to tax evasion.

    Part of that differences is not uncommonly due to “the spirit of the times” and who’s occupying the bench. So whether what Romney did or does is bad or not is not simply a question of right or wrong according to the tax code.

    Finally, the mortgage tax deduction and other middle class loopholes are a rather poor analogy: as you illustrate it is pretty clear to anyone that those are legal. Romney and other people who pursue tax avoidance strategies generally do not know whether what they do is legal. That’s why young people everywhere spend years of their life studying the intricacies of the tax law and the case law to at least argue that it is. For often the tax administration and certainly not the legislature know whether it is legal. It is then either discovered to be legal or discovered to be not and then the search continues. Sometimes the same equivalent strategy is labelled evasion and another strategy is labelled as legal.

    Strictly speaking you’re right by weighing the expected costs against expected benefits and making use of the division of labor to do so he’s not an idiot. However merely weighing the expected costs against the expected benefits is not sufficient to make you a good person, which, I believe is the argument you seem to be making here?

  3. “Does Team Obama really want us to believe that if Mitt Romney took advantage of every legal option to lower his tax bill that he is somehow bad, out of touch with the majority of Americans, or unpatriotic (whatever that is supposed to mean)?”

    Mario, relax, the answer is of course, yes. But relax, you pose a reasoned *economic argument*, with reasoned economics from good economics.
    Team Obama’s argument is purely about politics, nothing else. Economics plays has *zero* incidence here – zilch, nada. Team Obama believes that the footfolk voting populace will buy into this class warfare argument.
    And mind you – Republicans will come up with a silly political argument of their own, where again, economics will play absolutely no role.
    That’s what politicians do. And that’s why good serious economists have a day job – to count all the social costs of the silliness of politicians of either and both parties.

  4. The responsibility for the ambiguity of many parts of the tax code rests not with those who try to reduce their taxes by “taking advantage” but with the IRS and with Congress who make the code the mess it is. If Mitt Romney has done anything remotely illegal the IRS would have been on his case years ago. So I conclude that the only issue were he to make more returns public is that Team Obama would try to confuse the public and *suggest* that something is not quite right.

  5. Thanks, Luke. Galt lives on.

    Should we “relax” because demagoguery is political commonplace? Or should we continue to be outraged, redoubling our efforts to expose and denounce it? Are those efforts merely the day job of economists, or the responsibility of all enlightened individuals?

  6. Mario, responsibility is a two-way street, if A is responsible for B, then B is also responsible for A. To illustrate, if Alfie is responsible to keep his little brother Bennie out of trouble, then Bennie can be said to be responsible when Alfie needs to get Bennie out of trouble.

    Applied here it means that both Romney and Congress are responsible for Romney’s tax avoidance. Congress for making the law ambiguous and Romney for employing people to figure out a way to make use of that ambiguous law to reduce taxes.

    Is Romney a bad person for pursuing strategies to avoid taxes? Is Bennie a bad person for trying to find more and more elaborate ways of getting into trouble? I’ll just note that If Bennie cares about Alfie, he’ll try to steer away from trouble. For in the end Congress can only do so much to reduce the ambiguity of the law; after all whether or not a law is ambiguous is a question of degree rather than of kind.

  7. A seriously flawed analogy, Martin. Romney’s arranging of his finances to minimize his taxes is not comparable to Benny’s “getting in trouble.” By writing Byzantine tax law, Congress is not stepping in to get Romney “out of trouble.” Romney is as entitled to make his choices as all those folks are who buy instead of renting and buy bigger rather than smaller, in order to take advantage of the interest deduction. And Congress is not properly our big brother, despite the increasingly Orwellian reach of the federal government into every aspect of our lives.

  8. If we had a flat tax, we would not be debating any of this.

    Romney’s taxes are a smoke screen to avoid debating the issues, of which the economy and the fiscal cliff are by far the most important.

    I agree with Mario that, if Romney had been cheating, the IRS would have caught up with him a long time ago. He has been a public figure for quite some time.

  9. Tax avoidance and tax evasion are both good things.
    Congress, as Mr. Twain pointed out, is America’s only native criminal class.

  10. I agree, but do you really think the “fiscal cliff” will be such a disaster? Seems to me that Keynesians have there shorts in a bind because they really, really belief in the multiplier. Absent the multiplier, will going off the cliff be so bad?

  11. Allan, the analogy was not about that Congress is big brother, the analogy was to show that responsibility for tax avoidance is a two-way street. If you want to make the analogy more literal: Congress is acting on behalf of various groups of voters to accomplish certain goals through the tax system and Romney et al’s actions means that a larger share of the burden will fall on other voters/tax payers.

    Jerry, even if there would be a proportional income tax, then those problems would not magically disappear. Tax law is fundamentally ambiguous for various reasons not the least of which is the capital/income distinction add to the mix that the USA is not a closed economy and thus has tax treaties with various countries and you’re in for a whole lot of trouble when it comes to tax avoidance.

    That all is assuming that a proportional tax rate is the socially optimal one. There are several criteria that we desire in a tax system not the least that it is equitable and many people would find a proportional tax rate to be equitable. A proportional tax rate seems therefore quite out of reach.

    This brings me back to my original point though and that is that tax avoidance is a two way street. A progressive rate encourages tax avoidance but is for many people in line with equity; should equity be sacrificed or should Romney not avoid taxes? Is Romney a bad person because his behavior means that equity has to be sacrificed?

  12. Martin, anybody can read your original comment and see that it contained an analogy between Congress and “Bennie’s” big brother “Alfie.” It is a defective analogy, as I pointed out.

    Yes, if Romney chose to pay more taxes than required by law, somebody else’s taxes might theoretically be reduced. The same would be true if other people decided not to take interest deductions to which they are entitled. Indeed, if you would just donate X dollars to the feds out of your abundant civic-mindedness, theoretically somebody else could pay less. So what? You don’t have a point — at least, not one that applies to Romney any more than to tens of millions of other Americans. And the cheap political criticism of Romney specifically was the subject of this thread.

  13. Allan, the point of an analogy is that it shares one characteristic that is relevant with the question at hand. To draw parallels between the other characteristics of the analogy and the question at hand is pointless.

    The analogy was on one point and one point only, namely that the responsibility for tax avoidance is a two-way street. To put it in other words: the cause or responsibility of tax avoidance is fungible. To say therefore that Congress causes or is responsible for tax avoidance is sterile at best. The Romneys of this world could also try to avoid less taxes.

    Furthermore the analogy between the interest rate deduction and tax avoidance is a non-starter. The meaning of an interest-rate deduction such as the mortgage millions of Americans engage in, is pretty plain and clear. If it were not, not millions of Americans would be able to use it. It’s stated goal is pretty much in line with how it is used. On the other hand, Romney’s tax scheme and tax avoidance schemes in general are not as plain and clear as the deduction for the mortgages; that’s the reason why so many people study so long to help the few that can afford it.

    Finally, I don’t see it as a cheap political criticisms. One of the principles underlying the tax code is equity. This principle is there because it is shared by many people in society. If Romney is pursuing or has pursued aggressive tax avoidance strategies, then you as a voter know whether Romney shares your conviction.

  14. Allan,

    If Romney chose to pay more in taxes than he had to, that would not “theoretically” (or non-theoretically) cause someone else’s taxes to fall. Anyone else pays whatever he pays, given his adjusted gross income and tax rate, thanks to the tax law, not because Romney or anyone else decides to pay more.

    The financial press often claims that if taxpayer X pays less in tax, then taxpayer Y must pay more. That is complete nonsense. I wrote a letter to the editor of the War St. Journal once about it, but they didn’t print it.

  15. Martin ,

    The tax code has no more to do with equity than a mugger does when he steals your wallet. Taxation is theft. The operation of the State divides society into two hostile camps, net tax payers and net tax consumers. The latter group steals from and exploits the former.

  16. Martin, as the saying goes, when you are in a hole, stop digging. You are the one who drew an analogy between Romney/Congress and imaginary “Bennie”/big brother “Alfie,” and it doesn’t hold water, as I noted. What is pointless is your attempt to justify the absurd criticism of Romney for not paying more in taxes than the law requires.

    Bill, I hope you recognize that I was setting aside one issue in order to get to the heart of what is wrong with Martin’s analogy. Holding total government revenue constant, if one person pays more then others would have to pay less. That’s arithmetic, and it was one of Martin’s points, slightly clarified from the first paragraph of his first response to me. The problem for Martin, whether or not he accepts it, is that the same applies to interest deductions by middle-class homeowners, and even applies to his own (presumed) failure simply to donate more money, out of civic-mindedness, to the government. In effect, that is what Romney is being criticized for failing to do, and the criticism is cheap politics, nothing more.

  17. Allan,

    Government revenue is the sum of all taxes “paid” I.e. confiscated from net tax payers. (A government bureaucrook, who steals $x at his “job”, doesn’t pay an income tax on that of $y that he remits to the State. He is a net tax thief of $(x-y).)
    Government revenue is not held constant, so if one person “pays” more, this does not imply a lower rate of theft from someone else.

  18. It doesn’t make any sense to me why you all are wasting your time trying to analyze Romney’s tax deduction. If tax deductions are legal then everyone has a legal right to them. If these tax loopholes are hurting our economy so bad, then why in the past 3 &1/2 years Mr. President hasn’t done anything about them even though he is well aware of them and he is using the subject for campaigning purposes over and over? I am sick and tired of hearing about tax loopholes as well as Buffet pays less tax than his secretary. Why Obama hasn’t fixed this issue yet? First, NO HE CAN’T! Second, then he won’t have a campaigning topic!

    We should not be ignorant and believe whatever media tries to feed public for their own gain, instead we should keep an open mind and do our own research to know the truth behind every story that comes out of white house. The important thing to understand is that half of the stuff we hear from politicians are empty promises and the other half is part of their campaign process to ruin their opponent’s reputation. I don’t think Romney’s use of his legal tax deduction is worse than Timothy Geithner’s tax drama when he was appointed the Secretary of Treasury by President Obama. I did not hear much on that important topic from President Obama. Of course, Geithner did not commit tax fraud; he simply made a mistake not to file his taxes in time. Next time anyone of you has an issue with IRS, just use “Geithner Clause”!!!

    Well, no matter who ends up in the White House in 2013, we all should remember that politicians never keep their promises. There is something about White House that causes amnesia!!! Mostly politicians are the same to me, but I cannot stand false and misleading hopes to fool people to get elected. Right now, unemployed people are hurt and politicians should spend their energy fixing our economy and putting people back to work. That’s what I want to hear.

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