“The word's out that he [Romney] hasn't paid any taxes for 10 years.”
— Senate Majority Leader Harry Reid (D-Nev.), on the floor of the U.S. Senate, Aug. 2, 2012
Reid has generated a lot of controversy with his claim that presumptive GOP nominee did not pay any taxes for 10 years. He originally told the Huffington Post that a person who had invested with Bain Capital had called his office and told him this. Then, he told reporters in Nevada that “I have had a number of people tell me that.”
Reid has refused to identify his source (or sources). Romney and his campaign aides have emphatically denied the charge but Reid has stood firm. “I don't think the burden should be on me,” he said. “The burden should be on him. He's the one I've alleged has not paid any taxes.”
This whole exchange poses a fact-checking conundrum. Generally, we maintain that the person or the campaign making the charge must back it up. Reid has refused to provide any evidence, except for the (unproven) fact that someone called him up and told him something that may be true — or simply a rumor.
But we can still examine how credible this rumor might be.
Romney has refused to release more than two years of tax returns, citing a precedent that is not very credible; he earned three Pinocchios for that claim. Most presidential candidates in recent years have released more than two years of returns, so Romney may be paying a political price for failing to release more.
But Romney’s 2010 return and his estimated 2011 return do show that he paid substantial taxes in those years. In 2010, he earned nearly $22 million, including $3 million in taxable interest, nearly $5 million in dividends and more than $12 million in capital gains. He reduced his taxes by giving $3 million in charitable contributions (much of it in appreciated stock, which shielded him from paying additional capital gains.)
In other words, this tax return shows a portfolio that is not structured to yield zero taxes. We spoke to a number of tax experts, all of whom said that, given Romney’s current portfolio, it was highly improbable for Romney to have had 10 years with tax-free returns — though there could have been one or two years with little or no taxes.
(We will lay aside the interesting question of Romney’s individual retirement account, valued at as much as $100 million, which may have benefited from Bain Capital’s practice of allowing employees to co-invest retirement funds in takeover deals.)
Charitable contributions, first of all, could only get Romney so far. Taxpayers cannot eliminate tax liability only through charitable contributions.
Still, Romney at one point could have invested all of his money in tax-exempt bonds, though that is not his investment strategy now. (IRS figures show that 61 percent of high-income returns with no tax liability stemmed from tax-exempt interest.)
Romney also could have timed the sale of stocks or made other investment decisions that would have yielded losses that offset capital gains. Len Burman, a professor at the Maxwell School of Syracuse University, said IRS data show that 5.7 percent of the high-income returns had as a primary reason losses from partnerships and closely-held business. “We know that Governor Romney had a partnership, and it had losses in 2010,” he said. “It’s possible that those partnership losses were large enough to offset taxable income from compensation, rents, interest, dividends, and royalties.”
Romney also could have invested in tax shelters. Edward Kleinbard, a law professor at the University of Southern California and former chief of staff at the Joint Committee on Taxation, noted that Romney chaired the audit committee of Marriott International when it engaged in a highly aggressive tax shelter that was successfully challenged by the Internal Revenue Service.
But none of this appears to add up to 10 years of tax returns with no taxes paid. “It is theoretically possible, but it seems quite improbable in practice given the portfolio in 2010,” Kleinbard said. “It is improbable that a man of his wealth would have paid no taxes for 10 years.”
Robert S. McIntyre, director of Citizens for Tax Justice, said that Romney “probably reported income every year” but that he might have paid as low as a 2 percent tax rate in one year. “That’s close enough to zero for me,” he said.
Still, Reid claims that Romney did not pay taxes for 10 years. Moreover, he claims to base this on information from a Bain investor, without explaining how someone not intimately familiar with Romney’s tax situation would know details of his taxes.
We asked a Reid spokesman for more backup information and for the name of a tax expert who could back up Reid’s claim but did not receive a response.
The Pinocchio Test
We use a reasonable person standard here. Without seeing Romney’s taxes, we cannot definitively prove Reid incorrect. But tax experts say his claim is highly improbable. Reid also has made no effort to explain why his unnamed source would be credible. So, in the absence of more information, it appears he has no basis to make his incendiary claim.
Moreover, Reid holds a position of great authority in the U.S. Congress. He should hold himself to a high standard of accuracy when making claims about political opponents.
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