Saturday, September 22, 2012

The Romney Tax Summary Still Obscure


Mitt Romney has asked his tax preparers to divulge what percentage of his income was paid in taxes and in charitable donations for a number of years. They did so for a period of 20 years but the wording of their testimony keeps the sought-after facts as obscure as ever. Here is how that wording was formulated: The average of the annual tax rates as computed based on the returns as prepared during the period was 20.20%.

It must be understood that there can be a huge difference between the straight average of a set of numbers, and the weighted average of a set of paired numbers. To make things simple, we take an example representing only 2 years instead of the 20 years mentioned above. As far as the math is concerned, what is true for 2 years will apply just as well for the 20 year period.

If Romney paid taxes at the rate of 26.74% in one year and the rate of 13.66% the next year – which is the minimum he says he paid – the straight average method would yield 20.20% as reported. The way you arrive at this value is by adding 26.74 to 13.66 which comes to 40.40. You then divide that result by 2 (because there are 2 years), and this will yield the average value of 20.20%, what the tax preparers and the Notary Public say Romney paid.

In fact, working with the percentages alone, you do not need to know how much money Romney made in either year to arrive at that result. But if you need to compute the weighted average of the taxes he paid, you need to know how much money he made in each of those years. So then, let us assign a fictitious number to each year. As far as the math is concerned, what would be true for these fictitious numbers would be true for the actual numbers should they be divulged someday.

Let us say Romney made 1,000,000 dollars the first year and 5,000,000 dollars the second year for a total of 6,000,000 dollars. If we go by what the tax preparers and Notary Public say – which is that Romney paid an average of 20.20% – without asking further questions, we come to the total value of 1,212,000 dollars paid in taxes. But did he pay this amount? Probably not.

And here is why. It is that there is another way to calculate things. Instead of a set of simple numbers, we work with the weighted average of the paired numbers. They are the 1,000,000 dollars at 26.74%, and the 5,000,000 at 13.66%. Computing the yield of the first pair, we obtain 267,400 dollars paid in taxes that year. Computing the yield of the second pair, we obtain 683,000 dollars that year. The total taxes paid for the two years would be the sum of the two numbers. That total comes to 950,400 dollars. And this is below the 1,212,000 dollars computed by the straight average method.

Now, to compute the average rate in percentage terms using this method, we divide 950,400 by 6,000,000 and multiply by 100 (to put it in percentage form) and obtain 15.84% which is the weighted average of the pairs of numbers. And this is below the 20.20% obtained by the straight average method. If this is what Romney did, it would indicate that the more money he made, the more deductions he took in order to lower his taxes. And this poses the question: What kind of deductions were they?

All in all, what this says in the end is that a true picture of Romney's tax situation cannot be accurately assessed from the summary that his tax prepares have produced. When you add to this the fact that he delayed submitting the tax returns for 2011 to do them over, claim less in charitable donations and thus remain within the 13.66% minimum he promised he would not breach, you wonder what else this man would not do to get elected.

Nothing will save his credibility now but the full disclosure of those 20 years of tax returns. He would be wise to release everything come what may because the speculation will otherwise never end.