In the last two posts, I explored a number of fairly simple questions that might be raised about Romney's activities that would be clarified by seeing multiple returns (hobby versus investment/business losses; business versus passive activity losses; amounts of preferentially taxed income; income reported from Bain Capital and/or from foreign accounts) and some of the "squirrelier" possibilities that tax experts have raised (potential that Romney participated in the IRS voluntary disclosure "amnesty" program for reports on offshore accounts after the initiation of unraveling of Swiss banking secrecy as a result of the UBS scandal, in order to avoid weightier penalties, including potential criminal charges; contributions to IRAs that were undervalued, possibly by claiming zero value for partnership interests; use of aggressive tax sheltering transactions to 'create' capital losses to offset substantial capital gains, resulting in the net capital loss carryforward on the 2010 tax return).
Ed Kleinbard, a former partner at Cleary Gottlieb who served as chief of staff for the JCT and is now a law professor at Southern California, has joined with Peter Canellos, a prominent tax practitioner and former chair of the prestigious New York State Bar Association Tax Section, to address these issues regarding the importance of seeing multiple past years of Romney's tax returns. See Kleinbard & Canellos, Why won't Romney release more tax returns?, CNN (July 18, 2012). Hat tip Calvin Johnson.
So what do Kleinbard and Canellos add to this debate? Perhaps most importantly, they note the importance of transparency in the vetting of presidential candidates : as they say, "[t]he U.S. presidency is a position of immense magnitude and requires a thorough vetting." (emphasis added) Accordingly, they point out the advantage to the American public of the disclosure practice initiated by Romney's father George Romney four decades ago and .
Since George Romney inaugurated the practice more than 40 years ago by releasing 12 years of tax returns in his bid for the Republican Party nomination, presidential nominees have been transparent with voters about their personal finances. For this reason, we have not suffered a significant tax scandal involving a nominee or sitting president since President Richard Nixon's abuse of the tax code.
Disclosure goes to the heart of the truthfulness with which a nominee engages the American people, and it assures us that he in fact has comported himself before the election with the high moral character we associate with a future president.
What the American people deserve is a complete and honest presentation by Romney of how his wealth was accumulated, where it is now invested, what purpose is served by all the various offshore vehicles in which he has an interest and what his financial relationship with Bain Capital has been since his retirement from the company. These are all factors that go to the heart of his character and values.
Like the rest of us who have discussed this issue, Kleinbard and Canellos note that it is Romney's abject refusal to follow his father's example and disclose a decade's worth of returns that "undermines the assumption" that would otherwise apply "that there cannot be any tax skeletons in his closet." Our only tool is to "reconstruct his financial record" from what he has released. And that leads us to "red flags that raise serious tax compliance questions with respect to his possible tax minimization strategies in earlier years." Disclosure, they note, could "replace speculation with truth-telling."
Kleinbard and Canellos go on to discuss some key issues (some already addressed in prior posts)
- the Swiss bank account: Why would a presidential nominee be betting against the US dollar by speculating in Swiss Francs? The account was closed in 2010, but was its income reported on earlier returns and were the FBAR reports timely filed as required? Did the Romneys participate in the 2009 partial tax amnesty for unreported offshore accounts?
- the $100 million IRA: How could an account restricted to annual contributions of $30,000 grow to $100 million? Does it represent "unprecedented prescience in ... Romney's investment choices" or does it mean that "Romney stuffed far more into his retirement plans each year than the maximum allowed by law by claiming that the stock of the Bain company deals that the reitrement plan acquired had only a nominal value" (relying on a safe harbor rule about taxation of service partner's receipt of such interests that is, however, inapplicable to contributions of those interests to a retirement plan)?
- the Romney family trusts: "Did Romney report and pay gift tax ... or did he claim similarly unreasonable valuations, which likewise would have exposed him to serious penalties if all the facts were known?
- the complexity of Romney's assets: even multiple years of returns won't answer all these questions given the "complexity" and "arcane" and "opaque" nature of Romney's financial affairs, so disclosure about specific issues, such as the $100 million IRA, will be needed
- the low Romney tax rate: a tax rate of 13.9% on $22 million is exceedingly low--lower than the rate paid by ordinary American wage-earners making 40-50 thousand a year. How can we trust Romney to enact wise policy--which the vast majority of tax experts concur is to remove the super-preferential rate on the compensation income of private equity fund managers? "Romney has not explained how, as president, he can bring objectivity to bear on this tax loophole that is estimated as costing all of us billions of dollars every year."
Will Romney respond to these continuing calls for full disclosure about how his wealth has been built, where it is invested, and just what purpose the various offshore entities serve? If he does not, we can only think the worst.