Thinking about possible reasons for Mitt Romney to not release his tax returns

A thought experiment: imagine you're Mitt Romney. Why might you choose to not release your tax returns prior to 2010?

First, I want to address the matter of principle. I suppose any man, especially a wealthy man, might be loath to release his tax records. They can reveal a great deal about a person - their donations, their assets, the type and manner of income, and the various deductions. It is entirely possible that everything done was legal, and, moreover, ethical.

But it's too simplistic. And as we know from Lance Armstrong's "no contest" position on doping, in the matter of public opinion, one really is guilty until proven innocent. So, again, acknowledging the possibility that there is nothing either legally or morally wrong with any of Romney's tax records, I'm going to speculate on what might be wrong.

As a starting point, consider the time frame involved. Harry Reid, in either a moment of partisan inspiration or particularly psychotic gaffe, claimed that Romney hasn't paid taxes in the last ten years. Further, note that the Obama administration offered a deal to Romney: show us five years of returns, and we'll drop it.

To clarify, I'm assuming that the appropriate time frames are 2001-2011 and 2007-2011, give or take a year, as I'm not clear whether the released 2010 return and 2011 estimated tax are counted.

The five-year time period is particularly intriguing. Whatever happened in 2001-2006, it wasn't nearly as interesting as what happened in 2007-2011. In other words, his income from his time at Bain Capital is not the issue.

So what happened during 2001-2006? A tech bubble burst, and a recovery, accompanied by an even greater bubble in real estate. Though perhaps not relevant, I'll mention that 9/11, the Iraq War, and Katrina fall into this time period.

What happened in 2007-2011? A massive crash and recession brought about by a collapse in the real estate and credit markets, and only the beginnings of a recovery.

But there are other things that occurred during the last five years.

1. California Proposition 8

Prop 8 sought to overturn gay marriage in California. It passed by a pretty narrow margin, and was heavily funded by out-of-state organizations, including conservative religious institutions like the Church of Latter-Day Saints.

2. Repeal of long-term and reduction of short-term capital gains taxes

I remember that, at least for 2008 (and possibly other years), the long-term capital gains tax was eliminated. For example, this means any American taxpayer could sell stock held for at least one year and not pay any taxes on the gain. I know this is true because I took advantage of it myself. The short-term capital gains tax, while not zero, was reduced to 15%.

Could these be relevant?

Perhaps.

Warning: I'm going to engage in tax hypothetical situations

Let's assume Harry Reid isn't ridiculously off-base with his claim. How could this be true? Maybe it could be done if Romney realized massive amounts of short-term losses in 2001-2002, then carried forward those losses to offset short-term gains in the future. (This can be done, if I recall, for three years.) So, depending on how badly Romney's assets took a hit during the tech bubble crash, he could have paid no taxes at all during 2001-2005.

However, he could also have known, as I'm sure many senior Republicans (and Democrats) were aware, that Bush would push through a tax cut that would lead to the abolition of long-term capital gains. And so, being savvy, he might have held stocks from after the tech bubble crash to some point in 2008, hopefully, for his sake, before the financial crisis. He could have realized large gains (60-70% is not unreasonable, given the performance of the S&P500 during that period) and not had to pay any taxes on those gains.

Of course, any ordinary income could continue to be taxed at his rate. And I don't know if short-term capital losses can offset ordinary income; consequently, it's pretty unlikely he paid no taxes whatsoever. (I would be amused, but surprised, if the Romneys had large amounts of heavily subsidized farmland.)

All of this would, of course, be perfectly legal and legitimate, and not have to make use of offshore accounts. Of course, adding that feature, and one could probably pull a tax rate in the single digits. And it would make Romney's son's comment, "He's paid his taxes", true, though perhaps unsatisfying in its completeness.

Finally, there is one other intriguing possibility: Romney shorted the market during the financial crisis. I think this is compelling, in part, because of his connections and financial sophistication. If he had invested with John Paulson, for instance, he would have made a massive amount in 2008. These hypothetical gains probably wouldn't have been tax-free - it'd be pretty impressive for someone to have been short the market for an entire year - but then again hedge funds do strive for tax efficiency.

Of course, this all assumes Romney got the market right. What if he got it wrong? Could it be embarrassing to reveal that he's a lot less rich than people think? that he, like the rest of us, got hoodwinked in 2001, and again in 2008? His advantage over Obama is supposed to be his business/executive experience.

The financial aspects are more compelling than the possibly massive donation to Prop 8. Quite frankly, I doubt being strongly anti-gay would hurt him all that much. As much as my gay friends have griped about Obama, not a single one that I know of will be voting for Romney in November.

All of this is idle speculation, however, and I don't have the energy or inclination to really investigate it. Presumably someone has. But I decided to engage in some thought experiments before I went digging, assuming I ever get around to it.