Having recently taken The New York Times to task over its coverage of taxes, I really do not want to return to this topic. I am tired of complaining, and you are probably tired of reading my complaints.
But The Times published a front-page exploration of Mitt Romney’s finances last week that was such a train wreck of error and misinformation that I feel I have no choice. I’m just an amateur pundit, but I am a professional tax adviser, and I have worked with people whose finances are similar to Romney’s for 25 years. Before I was a tax adviser, I was a reporter who covered government and politics. I know how hard it is to put together an accurate and informative story under deadline pressure, and I admire (and try to help and acknowledge) journalists who do their work well.
The Times’ reporters on this story did not measure up.
The article did not suffer for lack of manpower. It carried three bylines: David Kocieniewski, the Times’ beat reporter on tax matters and the focus of my Jan.10 critique; Nicholas Confessore, a political writer who is covering the 2012 presidential campaign, and Michael Luo, a New York-based investigative reporter who previously worked at my old employer, The Associated Press. Four additional individuals, two each from New York and Washington, contributed reporting.
My guess, though it is only a guess, is that Kocieniewski supplied the misinformation about taxes, since he is the only member of the team who regularly covers that topic. The others most likely focused on gathering facts about Romney’s finances and providing the article’s political context.
The broad outlines of the story are well-known and not controversial (apart from the usual philosophical differences between Democrats and Republicans). Mitt Romney is a very wealthy man, thanks mostly to his history as a former top executive at Bain Capital, a leading private equity firm. Romney has not disclosed any of his tax returns, though he has said he will release his 2011 return in April. Last week, he said that his effective tax rate in recent years has been something close to 15 per cent. He was promptly attacked by opponents for paying what they contend is an unfairly small share of his income, considering that the top federal tax rate on ordinary wages is currently 35 per cent.
The Times sought to reconstruct as much of Romney’s tax position and tax-sheltering techniques as it could from the limited information that is in the public domain. Inevitably, this meant working with incomplete knowledge that could lead to mistaken conclusions, but that is not the reporters’ fault. They gave the Romney camp every opportunity to share more details. Understandably, Romney is not eager to put his entire financial life under a microscope, and voters will ultimately have to decide whether they care. I do not blame the Times reporters for working with whatever information they could get.
I do, however, fault the reporters – and their editors – for failing to seek out people who could tell them what the publicly available information actually means. Earlier this month, I attended the Heckerling Institute on Estate Planning – the nation’s top conference on the subject – with more than 2,000 other professionals. Most of them could have explained to The Times why someone like Romney would do the things The Times says he has done. But the article’s lack of professional sources was striking.
Most of the reporters I know seek out experts to translate arcane topics for stories addressed to a non-technical audience. Instead, the Times produced what my newsroom colleagues used to call a “thumb-sucker.” This is the result when a journalist who thinks he or she knows all that is necessary about a subject sits at a desk, (metaphorically) sucks on a digit, and writes whatever comes out. “Thumb-sucker” is not a compliment.
As I said, I suspect the thumb-sucking is Kocieniewski’s contribution. If I am correct, the colleagues who shared the credit for this article with him ought to think twice before they let that happen again, and Kocieniewski’s editors should demand that he attribute his statements about tax laws and planning strategies to experts that he actually interviews. He is not writing about classified intelligence matters that require anonymous sources, let alone a topic that requires no sources at all.
The article gets off on a wrong foot by asserting that much of the Romney family wealth is “held in blind trusts that conceal their full size from public view.” That is not what a blind trust does. Any trust – or for that matter, any financial account – is concealed from public view, unless the owner decides to disclose information about it. You probably don’t keep your brokerage account in a blind trust, but can your colleagues find out what it holds?
Public officials use blind trusts for the public’s benefit. A blind trust means a third-party trustee decides which investments will be bought and sold, and such a trust often ensures that the beneficial owner does not even know exactly what investment he owns. This is to prevent a public official from skewing his or her official actions to benefit a personal holding. Blind trusts are good thing.
The also paper claimed that there are “a variety of mechanisms, like grantor retained annuity trusts, that athletes, entertainers and businesspeople routinely use to push their income and tax liability into the future and spread it out over years.” This statement is nonsense.
These trusts – everyone in the field calls them GRATs – don’t have any income tax effect at all. The trust’s income is taxed at the same time and in the same manner as if the property had remained in the creator’s hands. In fact, the creator, or grantor, usually pays the taxes personally. Nobody uses GRATs to defer income taxes, because GRATs don’t defer income taxes. GRATs are a vehicle for mitigating gift and estate taxes. The grantor, usually a parent or grandparent, puts property into the trust and retains the right to receive payments for a lifetime or for a certain number of years. If the trust’s investments grow fast enough to outweigh the annual payments, the investment growth of the trust will pass to younger heirs free of gift and estate taxes.
Noting also that Romney “has reported over the years that he has had a financial interest in funds like charitable remainder trusts, which in some instances can allow substantial tax deductions,” The Times said the Romney campaign “declined to answer questions about the tax implications of those trusts.” OK – if you have a question about the tax laws, would you call a political campaign’s headquarters to get an explanation? Or might you call a tax expert?
Allow me to introduce myself. I’m Larry Elkin, tax expert, and I’ll tell you the tax implications of a charitable remainder trust. These are very handy tools if you have an asset, such as company stock, that has gone up in value significantly, and you want to sell and diversity the holding. If you do so directly, you trigger capital gains taxes. But if you put the stock in a charitable remainder trust, the trust can sell the stock without triggering immediate tax. The trust will pay you, or someone you designate, a portion of its value for a certain period of time, after which the trust terminates and whatever remains passes to charity. If a portion of the trust’s income or capital gain is distributed to you as part of the periodic payments, you pay tax on that portion. No tax is ever paid on the portion that goes to charity.
This type of trust makes excellent sense for people like the Romneys, who have had many investments that appreciated in value (that’s how he made his fortune), and who are generous contributors to charity. Why should they pay capital gains tax on wealth that they want to pass to their church or another philanthropic organisation? That would only benefit the government at the charity’s expense. The tax laws are written to avoid this result.
The Times also said that even if nearly all Romney’s income is taxed at the 15 per cent rate allowed for qualified dividends and long-term capital gains, Romney could lower his tax bill by deducting charitable contributions, property taxes and state and local income taxes. That’s probably not quite right. Contributions would be deductible, but in this situation the alternative minimum tax would, in all likelihood, sharply limit Romney’s benefit from deducting state and local taxes, including property taxes.
Moreover, The Times did not put the 15 per cent dividend tax rate into context. The rate only applies when the dividend comes from a company that has already paid federal income taxes on the same income, at rates up to 35 per cent. If you compare Romney to a small business owner, like me, who does not face corporate-level income taxes, the income his business interests generate (before considering his deductions) is likely to be taxed at a higher total rate than the 35 per cent maximum rate I currently pay.
It’s true that the Romney tax story broke abruptly, and that the Romneys have not made much of their personal financial data public, and that this is a significant story that deserved a close look. News is whatever people care about, and people care about this stuff. But writing a big story under pressure does not give reporters licence to be careless or lazy, two traits that were abundantly evident in the Times story.
When my daughter, then in high school, attended a summer journalism program, the first thing she and her fellow teens learned was this mantra: “If your mama tells you she loves you, check it out.” It’s good advice for student journalists. It is even better for those who write for The New York Times.