Wednesday, September 19, 2012

A Tax Driven Life (plus one drawing)

A Tax Driven Life

Governor Mitt Romney tries to divide America into two camps: those who pay federal income taxes (dependent on government), and those who don’t (the job creators?).  As many commentators have pointed out, the Governor didn’t understand or didn’t care that those who don’t pay income taxes are predominantly the working poor, elderly and unemployed.  He also ignores the fact that a small group of wealthy doesn’t pay federal income tax either.

I don’t think the Governor understands Turbo Tax Americans, who represent the vast majority of people whose tax liability can be calculated by purchasing software for $49.99.  Admittedly many Turbo Taxer Americans still opt for a pencil, find an H&R Block office or have their accountant calculate their tax liability.  The point is that their federal and state tax liability is pretty straight forward, even if the IRS instructions and forms are a nightmare.  It’s basically income less the standard deduction (or mortgage interest, charitable donations, etc.) with some possible credits.  Most Turbo Tax Americans file their returns on April 15th, unless they procrastinate or have some family emergency that prevents them from gathering the needed information and filling out the forms.

America's Dependency on  Animal Infrastructure (2012)

That’s not how Governor Romney does his taxes.  His tax bill cannot be calculated using Turbo Tax and he can’t possibly file on April 15th.   While the governor’s tax bill relies on some of the same provisions as the average American (charitable deductions, a healthy serving of capital gains), a great deal of his tax situation can only be determined after consulting arcane provisions of the tax code (many specially created for folks like the Governor), letter rulings and court cases.  So his team of accountants will take months to sort through his financial affairs before arriving at his liability.

However what really separates Governor Romney and a lot of other wealthy Americans (frankly wealthy people all over the planet) is that they lead a Tax Driven Life.  Almost everything he does must be measured through the lens of the tax code. When he buys a company, the tax code will give him a large discount on the purchase by letting him deduct interest on the money he borrowed, and a preferential rate when he sells the company.  If he wants to relocate the business, he’ll look for a tax break from state or local government or a foreign government.   If a credit or break doesn’t exist he’ll hire lobbyists to create the requisite tax preference.  This mentality is a huge part of business life.  Take away these breaks, and a lot of the deals and investments don’t seem nearly as attractive: talk about dependency.

More corrosively, this mentality bleeds into his personal life. His primary residence will undoubtedly be in a no-state income tax or low-state income tax, and he will carefully plan and account for his travel, so he can preserve his tax benefit.  He will build huge houses in places where the bankruptcy code allows a high or unlimited homestead exemption.   His charitable giving will be heavily influenced by the tax basis of his financial holdings.  And of course, those financial holdings will be imbedded in trusts or housed overseas in order to preserve the Tax Driven Life. 

After leading the Tax Driven Life for ten or 15 years, or in Governor Romney’s case, all his life, I think it becomes hard to understand what it is like to be a Turbo Tax American: to make a charitable contribution without consulting one’s tax advisor six months in advance; or buying a home because it’s near a job or family, rather than because the state has an unlimited homestead exemption or no income tax.  After his humble beginnings President Obama is headed toward the Tax Driven Life if he’s not careful, and he draws his largest donors from that world.

In a Tax Driven Life the top marginal tax rate rules much of one’s behavior.  Turbo Tax Americans pay the bill once a year, and otherwise go about the business of making ends meet.  I’m not sure Governor Romney can understand it.

Full disclosure:  I use an accountant and file on April 15th.


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