”Any
one may so arrange his affairs that his taxes shall be as low as possible; he
is not
bound to choose that pattern which will best pay the Treasury; there is not even
a patriotic duty to increase one’s taxes.

  —
Court of Appeals Judge Learned Hand, Helvering v. Gregory (1934) 

By far the stalest
of the few tired jokes about accountants, in its tax code version:

            Client:
How much is my taxable income this year?

            Accountant:
How much do you want it to be?

 How should we feel,
the fraternity concerned for the essential integrity of publicly-reported
financial information, about presidential candidate Mitt Romney’s 2011 taxes? 

In particular, what
about his choice to under-declare $ 1.75 million in charitable donations, to
avoid reducing his overall income tax rate below a previously-announced target
of 13 percent?

The US Treasury is
no doubt happy to accept Mitt and Ann’s resulting over-payment, and their
gratuitous contribution to be mingled with the trillions extracted from the
rest of the tax-compliant population. But under Judge Hand’s formulation, no added
virtue accrues to their extra-generous support of the federal government’s
activities.

The context for
Judge Hand’s famous pronouncement was a controversy in which the substance of a tax avoidance scheme was
held to prevail over the tax-payer’s argument that its form was strictly legal.  

Substance over form: What is
the reason? And the question follows: Does that reason pass a test for
credibility?

The first anomaly
arises because there is not a single number on a balance sheet or a tax return
that is not subject to some degree of judgment – not to say, flexible up to and
past the point of manipulation. The choices are never neutral – some interest
is always served.

• An
  entire career ago, my very first securities fraud investigation involved a life
  insurance company that for years invented fictitious clients, thus falsely over-stating its liability to pay death
  benefits – a “fool-the-auditors” technique that appeared counter-intuitive,
  until exposed as a Ponzi scheme made possible through cash-generating fakery in
  its dealings with re-insurers.

• Similar
  motives explain the padding of employee rosters with ghost employees (e.g., ZZZZ
  Best, decades ago, and Satyam in India). Over-stating expenses for payroll, office space and
  supplies would be perverse, except to off-set the criminally systematic booking
  of fabricated contract revenue.

So is this a Romney
head-fake? A smoke-screen of piety and beneficence behind which, like the
Wizard behind the curtain, are concealed the off-shore accounts and the sheltered
capital gains? Transparency and answers are both lacking, unrelieved by
purported “summaries.”

But, giving benefit
of the doubt to a vacuum of hard information, assume tax legitimacy. If the
motivation lies elsewhere than in the Romney family’s taxes themselves, is there
a political constituency to whom this tactic appeals? 

• For the
  bulk of tax-payers at the population base, whose income tax obligations are
  withheld by employers at the source and whose deductions are standard, the
  entire Romney approach is incomprehensible noblesse
  oblige.  

• For
  those a level higher on the income pyramid, enjoying some measure of return on
  their modestly accumulated capital savings, Romney’s ability to maneuver his
  tax rate between 11 % and 14 % is an advantageous opportunity only accessible
  to the Bain-enabled.

• For the
  one-percenters at the top, to whom tax minimization is an article of faith having
  theological dimensions, natural affinity for Romney’s otherwise sympathetic
  policies must be off-set by the appearance that, on his taxes at least, he is
  acting like a fool.

• And for
  Grover Norquist and those ideologically committed to opposing both growth in
  government and taxes on the wealthy – Romney himself having taken the pledge years ago – the foregone charitable deductions confirm
  Romney’s two separate acts of anathema:
  He has inflicted a tax increase directly
  on himself, and his resulting
  inflated payments only serve to grow the malign resources of a bigger federal
  government. 

If tax policy, like
charity, truly does begin at home, then those concerned about Romney’s
consistency and true conservative colors had best be placing defensive calls to
their own tax advisers. 

Or – if I am
missing something and there is anyone persuaded by his reasoning – please
advise.

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