Romney Agrees To Release Tax Returns — But Not Enough Of Them

January 23, 2012 11:50 am ET — Jamison Foser

Mitt Romney has finally agreed to release his tax returns — but only for 2010, along with an estimate for 2011. It isn't enough, for one very simple reason: Unlike most taxpayers, Romney has broad latitude to choose when to pay taxes and when not to do so.

Since the vast majority of Romney's income is capital gains income, he can essentially choose when he wants to pay taxes. If he wants to reduce his tax payment in a given year, he can simply choose not to sell assets that would be subject to the tax. Conversely, if he wants to increase his tax liability in a given year, he can sell off those assets. 

Cato Institute senior fellow Alan Reynolds argues that the ability to choose when to pay capital gains taxes renders an increase in the capital gains tax ineffective, as the wealthy can "avoid paying that higher tax rate" by making strategic choices about when to sell assets: "Simply hold onto assets that went up and sell those that went down, and never realize gains until you have offsetting losses. [...] Choosing to pay tax on capital gains and dividends is usually voluntary."

In Romney's case, the incentives are a bit different, since he's running for president. If he only releases tax returns for 2010 (and an estimate for 2011), he could intentionally pay a higher tax rate in those years than he typically pays by selling fewer assets. With lower capital gains, a smaller portion of his income would be taxed at the 15 percent rate, and his nearly $400,000 in speaking fees, which are presumably taxed at a higher rate, would constitute a larger share of his total income, resulting in a higher overall tax rate.

The bottom line is that if Romney releases only his returns for the most recent tax years, we should assume that the effective tax rates he paid in those years represent an upper bound of his typical tax rates — and perhaps an intentionally misleading upper bound at that. Or, as former Michigan Governor George Romney — Mitt's father — put it when he released 12 years of tax returns during his own presidential campaign: "One year could be a fluke, perhaps done for show." 

Finally, Romney's ability to choose to pay taxes on his millions of dollars in income when it is most advantageous to do so demonstrates yet another way the tax code is skewed in favor of the super-wealthy. A schoolteacher or a cop can't decide not to pay income taxes until the tax rate goes down, or until a year in which she has offsetting loses. Short of implementing a wealth tax, that structural advantage for the very wealthy may be unavoidable. But even if unavoidable, it demonstrates the unfairness of taxing capital gains at a dramatically lower rate than earned income.