I've written a series of postings on what Romney's scanty release of tax information shows us about his wealth and his concern for his country. The last of those was Romney's Tax Returns--What we do know (Part VI). (interested readers can follow the links back through earlier parts, to see the various types of questions that are raised about his tax avoidance techniques and the potential issues that are likely to be lurking in the tax returns that he refuses to release, especially the 2008-2009 returns.)
Romney finally released his actual 2011 tax return, after having provided an estimated return at the time of the release of the main parts of his 2010 tax documents (but not of everything we would like to see connected with his federal tax status). I will try to cover the additional information gleaned in posts through the end of this week, but readers may be interested in reading the Drucker article featured in Bloomberg today: Jesse Drucker, Romney 'I Dig It' Trust Gives Heirs Triple Benefit, Bloomberg.com (Sept. 24, 2012).
It's worth reminding readers of Romney's derogatory comments at a May fundraiser in a wealthy donor's Florida home implying that those who don't pay federal income taxes (but do pay payroll and Medicare and sales and property and state and local income taxes) are freeloaders who mooch off of everyone because they think of themselves as victims. See various postings on this "47%" topic, such as this one, this one, and this one.
It's also worth pointing out up front that the wealthy have many legal techniques for making high income while paying very little taxes (carried interest being one of them) and for passing along their wealth to their family without much payment of gift or estate taxes (the I DIG IT trust being one of them). Congress can and should eliminate many of these tax avoidance techniques. For example, Congress could eliminate the carried interest game (essentially a "Wall Street Rule" not incorporated in the Code) through very simple legislation making clear that managers of private equity funds and real estate partnerships and hedge funds shall treat all of their "profits interest" distributive shares as compensation income taxed at ordinary income rates like their secretaries, gardeners and nannies pay. Congress could eliminate the various estate tax gambits with legislation to forbid the various kinds of trust games the rich play and the various kinds of "discounts" that they claim for self-created (and easily undone) restrictions on transferability of passed-along assets through S corps, family limited partnerships, and trusts.
Now, on to Romney's intentionally defective grantor trust (commonly called the "I DIG IT" trust). Here's what Drucker says:
He [Romney] has also enhanced his family’s wealth by moving assets worth $100 million into a trust while taking steps to avoid paying any gift taxes. The trust’s value isn’t counted in the $250 million that his campaign cites as Romney’s net worth.
... The return doesn’t show how much Romney paid for [the fund and other investment] holdings [added to the trust], nor the value assigned to them when he gave them to the trust, so it’s unclear how much in total the trust has saved in gift and estate taxes.
...The Obama administration estimates that closing the loophole Romney used would bring the gederal government almost $1 billion in the coming decade. That's a 'laughable' under-estimate, said Stephen Breitstone.... A single billionaire could pay $500 million more in estate taxes if these trusts are shut down. ...
Romney or his trust received shares in DoubleClick eight months before the company went public in 1998. The trust sold them less than a year after the IPO. The trust's sale of the DuobleClck stake made it possible to save hundreds of thousands of dollars in estate and gift taxes.
Multimllionaires use such trusts to avoid those taxes in three ways. First, they can assign a low value to assets they donate to the trust. Second, when the trust sells assets at a profit, the donors can pay the relatively low capital gains taxes on behalf of the trust. By doing so, they leave more money in the trust, untouched by the much higher gift tax. Third, by paying those taxes, they can reduce the pile of wealth eventually subject to an estate tax when they die.
Here's how they work: the person setting up the trust, like Romney, contributes assets such as an interest in a fund or shares in a company. If he makes that contribution before those assets appreciate--particularly when they are privately held and difficult to value--he can claim the gift tax obligation is low or non-existent since the declared value is low or zero. If the trust generates any income--such as by selling stock--the eventual tax bill is the responsibility of Romney, not the trust. By paying the capital gains tax, which was 20 percent in the late 1990s [when Romney's trust was established] and is now 15 percent, he can avoid depleting the funds in the trust--in essence making an additional donation that's free of gift taxes. That benefit in particular makes this type of trust 'a more powerful driver of wealth transfer in estate planning than almost anything else' said Breitstone. ... Id.
The defective grantor trust strategy was presented to Romney and Bain by a Boston lawyer at Robes & Gray as "a strategy for avoiding gift taxes by conservatively stating the value of assets put into a trust." Id. It was fairly common for such stakes related to profits interests to be valued at zero for figt tax purposes, though in 2005 there were proposed regulations that "discouraged the practice." Id.
Can Romney be faulted for taking advantage of this kind of trust to avoid taxes and pass along millions to his dynastic heirs tax free? Surely all the wealthy people that he thinks of as his peers do so--more than 3 million U.S. trusts and estates had $91 billion of income in 2010. Id. But for someone who wants to be president, wouldn't you think he would have some sense of at least "noblesse oblige"--a duty to pay a little more than the measly 14% or so that he pays in taxes to the country he wants to boss (er....serve)?
Clearly Romney doesn't have any sense that wealthy people should be paying more. He has indicated that part of his agenda as President would be to eliminate ANY gift and estate taxes, making it even more likely that America by 2040 will be a country of a plutocratic elite with enormous wealth living in protected communities of like-kind people and completely segregated from the overwhelming majority of ordinary Americans who earn their living with hard work that is actually taxed as hard work.
As for myself, I do think Romney can be faulted for using these trust techniques to preserve his family dynasty at the cost of the federal fisc. But I don't think wealthy people like Romney care what ordinary people think about this issue (refer again to his comments about many Americans, above).
But he has perhaps done us a service by running for President, because even with the scanty information he has released, we can see something of the way the ultra-rich avoid paying taxes. As Breitstone says in the Drucker article, he "uses every trick in the book" and "It's going to be harder to do tax planning in the future [because] he's bringing attention to things that weren't getting attention." Id.
Congress needs to act to eliminate these known types of shelters used by sophisticated wealthy taxpayers to get around the estate tax. And let the rate go back up as it is slated to do at the end of the year. Maybe if we get a saner Congress, Congress would even consider enacting a graduated rate that goes from 55% on the above-exemption amount to as high as 70% for those estates in the tens of billions.