A Win for Trust Fund Babies

Oh, to be Matt, Tagg, Craig, Ben and Josh...Romney. A couple days ago, likely spurred by the releasing of his tax returns, we now know that Massachusetts Governor and GOP presidential hopeful Mitt Romney is not only really wealthy, but he has set aside near $100 million for his kids.

That is not the part I care about, but I do care about how he got it there.

As the CNN article accurately states, under current law you can transfer some $5 million to other during your lifetime, or at death. Double that for a married couple. That does not add up to $100 million. Yet a Romney spokesperson claims they have not paid any gift tax.

How does this happen? Let me count the ways. Without completely plagiarising the CNN analysis, there are a variety of valuation discounts, fancy trusts, and other estate and tax planning mechanisms that you can use to give money to someone else. Valuation discounts means that you can claim a $100 asset is only worth $50 because of how it is owned, controlled, or other really good excuses. The fancy trusts accomplish a similar goal by isolating an asset, usually a stock, oil/gas resource, even a small business, and having any increase in value pass tax free onto someone else. However, the key to all these is an underlying asset or class of assets that experiences growth. You don't accomplish much of anything if what you put in the trust starts worth $100 and ends worth $100.

There is good, and then there is Romney-good. Assuming that all the gifting was not done in the last couple years, in reality the underlying assets had to be valued at a maximum of a couple million (as the current $10 million limit/couple  was $7 million/couple in 2009, and as little as $2 million/couple as recently as 2003). This means that, roughly, he turned $2 million in tax valued assets into $100 million. In less than a decade or so. This is incredible.

We can't all be Mitt Romney. Politics aside, we can hope to use the strategies he has used to grow and transfer wealth to our loved ones. You do not have to have millions to take advantages of the same tools Romney has used, you just need a competent estate planning attorney. Or marry a Romney. Both work.

The State of the Union is...

The President just finished his speech. What did we learn? Not much, sadly.

More of the same calls for tax reform: the middle class is getting punished, everyone should pay their "fair share, " and even a cameo for Warren Buffet's secretary.

The Positives: The President did comment on the continued discrepancy in out nation's taxation of corporations verses others, and the losses of American jobs and tax revenue to foreign nations based solely on corporate tax rates. This has to change, and I think it will, regardless of who is in the White House for the next term.

The Negatives: Of course Warren Buffet's secretary pays a higher effective tax rate than her boss. See my previous post.  To fix this, you would have to call every type of income: earned wages, investments, rents, etc.,  the same. This would punish the middle class even more, as their potential retirement savings would be hit with an additional penalty. That won't work.

Of course Mitt Romney is only going to have an effective tax rate of 14% or so.  He is a millionaire, and he makes his money through investments. The super rich are not the problem per se, they are just doing what is legal, and what everyone else wishes they could do: not work, and just watch their money grow.

The President has come out and said publicly that millionaires such as Romney should send at least 30% of their income to Washington, and GOP hopefully Gingrich has taken the other route, saying that investment income should not be taxed at all.

Without running the numbers, it is difficult to endorse either of those programs. However, with the current state of affairs, it is difficult to endorse the status quo. It will be interesting to see what policy ends up in effect.

Breaking, News, First

I know I don't post all that often, but when I do, I hope you know that you are getting original thought and analysis.

If I am going to use someone else's thoughts, I give them credit. So yesterday, when I talked about Mitt Romney, I didn't expect CNN to copy and paste my thoughts onto their website.

Call me crazy, but my thoughts yesterday seem oddly similar to this article written by a Charles Riley for CNNMoney.com, published today. From the Herman Cain references to the Grover Norquist bit, I'm wondering if he consulted yourtexasestateplan.com before submitting his piece.

Either that, or maybe I should get a syndicated column. Thanks for nothing, CNN. 

8 votes...

The Iowa Caucuses are over. What does it mean? Not much, really, unless you are Michelle (o) Bachman, or maybe Rick Perry, who didn't do so hot. Newt is apparently mad, which is a shame, because I like Newt. He even posed for a picture with me, (see below).


But I digress. The winner, and the leader for now in the GOP carousel of candidates is Mitt Romney. Unlike our previous post's subject, who sadly is no longer with us in the race, Romney's website is not emblazoned with a three-digit tax plan and analysis. So, we have to go elsewhere to see what President Romney would have our tax system look like.


No thanks to http://www.mittromney.com/, lots of thanks to http://irs-hitman.blogspot.com/2011/11/mitt-romney-tax-plan.html for outlining what he thinks.


The Basics:


Romney, like every Republican held by the shorts of THIS GUY>>>
(if you don't know who the man to the right is, see his bio here)
can't really say he will raise taxes, else face political doom. So, he sticks to the general basics of eliminating capital gains tax and estate tax, lowering the corporate tax rate to 25%, and eliminating capital gains for earners of less than $200k. (assuming my source is accurate). Another source claims most of the same, and that he opposes the flat tax, and is neutral on the alternative minimum tax (which, if you don't know what it is, it probably deserves its own post.)


Real World Analysis:


I know I was harsh on Herman Cain, but at least the guy thought about taxes, and had enough gumption to make his own plan, however flawed it was. Maybe I'll retroactively bump his grade up for effort. Romney hasn't really said anything, except the basic Republican party line jargon of "hey let's cut taxes."


For a guy who panders to the middle class, and was recently quoted as saying on a visit to Florida this summer "I'm also unemployed" to a group of jobless workers. This, from a governor and guy who is allegedly worth around $200 million, and also has recently been called out for not releasing his own tax returns, is tough to swallow.


The Verdict:


Does he have a plan? Maybe, but I don't know what it is. He wants to cut taxes and balance the budget. Can you do that? At the same time? Not unless you cut the defense budget, health care, or a lot of pork from somewhere else. I love tax cuts, who doesn't? But I also enjoy paved roads. And school. And going to sleep at night with a decent confidence that our boys/girls in uniform have my back. Mitt Romney receives an INCOMPLETE, pending further assessment of unsubmitted work.







Disclaimer: YourTexasEstatePlan, or its author, does not endorse any political candidate, party, or ideal. Publicly.


Newt Gingrich did take the time to take a picture with me, which does get him somewhere. 

Grading the Republican candidates new tax proposals: Cain's 999 plan

Per my earlier promise, lets try and get our minds wrapped around the tax proposals the Republican hopefuls are trying to champion. 


"Our tax code is the 21st century version of slavery" ~ Herman Cain


Good place to start. Lets start with how Cain describes it, per his website.


The basics:


Cain's plan hopes to replace the complex system of the tax code with a 9% rate for corporate tax, income, and sales tax. In addition, he eliminates capital gains, estate tax, and most deductions from the current code. The idea is to get rid of loopholes and kickbacks for certain individuals and businesses, cut taxes for most people, and pave the way for an ultimate transition to the  "fair tax," which is a true, flat, consumption tax. 

Real world analysis:

The tax policy center has taken pen to paper, and the plan would provide tax breaks, as long as your not in the 84% of Americans who would see their taxes increase. This is bad. It is even worse when you are in the $10,000 - $20,000 range, as you will see your taxes increased by, wait for it, 950%. Robin Hood he is not. 

Getting rid of the estate tax is also a tax break for the rich, and would have to be paid for somewhere else. The national sales tax, which he claims is not a pure consumption tax, is a pure consumption tax, and unless I am missing something would hike the prices of goods and services and be a nightmare to coordinate with the various state and national sales taxes already in place. 

The ideas to get rid of taxes on capital gains are positive. Incentives to invest and save are the cornerstones of many tax policies, and these can have staying power. 

Cain's rebuttal:

After the release of this study, Cain has responded with tweaks. 


Now, Cain says he would exempt those below the poverty line (~$22,00 in income), and have exemptions for "opportunity zones," defined by high unemployment and poverty. 

Color me crazy, but isn't an "opportunity zone," which no doubt will provide breaks for some who don't deserve and take away breaks for those who need them, creating the same disparities and inconsistencies Cain is fighting to remove? Further, even if you exempt the poor from the income tax, the poor spend a higher percentage of their income on goods and services, which under the 999 plan will be more expensive. Doesn't get you there. 

The verdict:

I don't think consumption taxes work. This plan is just that, and what you don't see are the 9% that will hit every piece of a supply chain: there is no way goods and services do not increase in price under this plan, which is not what America needs. The ideas to cut corporate and capital gains are solid, but the rest of the plan only works if you are wealthy. While this plan could have some legs in certain countries under certain economic times, I do not believe it is the answer for America's tax and economic future, due to its previously listed shortcomings. 

The simplicity is great, but our economy is not: I give the 999 plan a D+, passing only because it is simple and cuts taxes on savings and investments. America can do better.