Mitt Romney PwC Letter Is Meaningless, Reid Fires Back

WASHINGTON -- Mitt Romney on Friday released a letter from his tax accountant, PricewaterhouseCoopers, promising that Romney paid an "average annual effective federal rate" of 20.2 percent over 20 years. The number is being released instead of the tax returns themselves, and is being used to rebuff Senate Majority Leader Harry Reid's charge that Romney didn't pay taxes over a 10-year period.

But it is a meaningless figure.

According to the letter from PwC avowing the number, it is based on Romney's adjusted gross income. That means that, for instance, if Romney made investment profit of $20 million, but had losses of, say, $19.9 million, his adjusted gross income would only be $100,000. Paying 20.2 percent of $100,000 would cost Romney just over $20,000.

If Reid's comment is interpreted strictly -- that Romney paid literally $0 in taxes over 10 years -- then the PwC letter undermines that charge. But if Romney paid only a very small amount -- say, $20,000 on $20 million -- it would be hard to award Reid many pinocchios for calling that nothing.

Such a low-payment scenario is considered quite plausible by tax experts, who noted that investors can pick which investments to realize each year to maximize their tax benefit. In a year such as 2008, when the global markets tanked, an investor would likely have more than enough losses to offset gains. Indeed, Romney's 2010 tax returns show a carryover capital loss credit, meaning he had more losses than he could use the year before.

In other words, without seeing Romney's actual return -- or at least without knowing what Romney declared as his adjusted gross income -- it's impossible to know if the rate he paid bears any relation to Romney's economic reality.

"His poor father must be so embarrassed about his son," Reid (D-Nev.) told HuffPost earlier this summer, in reference to George Romney's standard-setting decision to turn over 12 years of tax returns when he ran for president in the late 1960s.

Reid said a Bain investor had told him that Romney paid no taxes over a decade

"Harry, he didn't pay any taxes for 10 years," Reid recounted the person as saying.

"He didn't pay taxes for 10 years! Now, do I know that that's true? Well, I'm not certain," said Reid. "But obviously he can't release those tax returns. How would it look?"

Romney's claimed rate is misleading in another way. Boston College tax law professor Brian Galle noted that Romney's IRA has grown since 1999 at a rate of roughly $9 million to $10 million per year. Yet he pays no taxes on those gains. Adding $10 million to his 2011 income of $13.8 million, for instance, nearly doubles it, meaning his tax rate is roughly half of what his real gain was.

"Mitt Romney was paid an immense amount for services rendered and is not putting it in his income. ...To say he has a 14 percent rate doesn't capture the economic reality of what's happening," Galle said. "It's more like Romney has a salary of $10 million and he's paying 14 percent on $1 million and the rest just isn't included."

The Washington Post's Greg Sargent identifies a third reason the average of 20.2 percent is meaningless. As the campaign told Sargent, it's an average of rates, rather than the simpler and more accurate calculation, which would divide his total earnings by his total taxes paid.

If Romney paid his lowest rates in a number of the higher income years, the overall 20 percent figure would overstate the rate he actually paid over the whole period. Williams provided the following purely hypothetical example:

“Let’s say you have 10 years in which you paid 13 percent in taxes, and 10 years in which you paid 27 percent,” Williams told me. “If you average those rates, you’ll get an overall rate of 20 percent. But if the 13 percent years were high income years, and the 27 percent years were low income years, then his total taxes paid as a share of total income over the 20 years would be less, perhaps significantly less, than 20 percent.”

Yet in that scenario, the Romney campaign would be claiming, by its chosen metric, to have paid 20 percent.

Reid has been quick to dismiss the PwC letter, calling for Romney to release the full returns and saying in a conference call with Nevada reporters that an "outline by some accountant about his blind trust, that’s not going to do it."

UPDATE: 9/23/12 3:13 p.m. -- David Cay Johnston flags a fourth element of the PwC letter that makes it meaningless. The tax preparers specifically and repeatedly use the term "owed" rather than "paid," leaving open the possibility that Romney owed taxes for certain years but did not pay them until later years, perhaps after an audit. The letter adds that it is "unaware" of any unpaid balances at this point. (Romney has previously acknowledged that he has been audited.)

"Each year during the period there were federal and state income taxes owed," the letter reads.

Here's Johnston on MSNBC:

The word "owed" is important because it suggests that there was an audit that resulted in a large payment of tax later because they underpaid the tax, an amended tax return by the Romney's, or an obligation that they didn't pay for some number of years.

So I wrote the campaign and asked them, and they know this statement is going to be very closely scrutinized. And this is afterall a verb. Why didn't they say "paid?"

The short answer that I got back was: "Not answering that question."

The Romney campaign didn't immediately respond to a request to elaborate.