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Wednesday, April 14, 2004

When I was 57, it was a very good year

A review of President Bush's and Vice President Cheney's 2003 federal tax returns, which were released to the public yesterday, reveals another financially successful year for two rich old boys from Texas.

Bush's tax status was virtually unchanged between 2002 and 2003. For the latter year, he had income of almost $400,000 from salary, around another $400,000 of interest income, $23,000 of dividends, and around $2600 of royalty income. He and his spouse took roughly $95,000 of itemized deductions, up from about $84,000 last year, with the increase largely attributable to a "miscellaneous" expense that wasn't disclosed on the portion of the return that was released to the public.

The First Couple paid $227,494 in federal income tax for '03 on a taxable income of $727,083. That's an effective rate of 31.29 percent of taxable income, and 27.67 percent of their gross. The rates the previous year were 34.75 percent and 31.39 percent, respectively. The decrease is no surprise -- the Bush tax cuts tend to favor rich, married, single-wage-earner couples like George and Laura. In fact, under the tax laws in effect when Bush was elected in 2000, the Bushes' taxes for 2003 would have been more than $260,000.

And so the Bushes are paying around $35,000 less in federal income tax now than they would have in 2000.

Cheney's return is always more interesting, because the Vice President is one rich s.o.b. He and his spouse grossed around $1,988,000 from all sources, including $454,000 of salaries, $627,005 of tax-exempt bond interest, $137,644 of dividends, $6564 in taxable interest, $44,500 from Lynne Cheney's consulting business, $327,643 of book royalties, and $302,000 in capital gains on sales of more than $10,000,000 of mutual fund shares in the early part of 2003. (They got out of Treasury bond funds -- "big time," as the Veep himself might say.)

For 2003, the Cheneys had so many tax goodies on their return that they had to pay alternative minimum tax (AMT) -- a special tax designed to prevent taxpayers from overdoing it on tax-favored items. This cut into the tax benefits of their deductions substantially. They wound up owing $248,369 in income taxes (including AMT, but before a foreign tax credit of about $7,000) on a taxable income of $813,266. That's an effective tax rate of 30.54 percent of taxable income, 19.59 percent of their adjusted gross income, and only 12.5 percent of their total gross, including the interest on their tax-exempt bonds. They did pretty well on those counts compared to '02, when the percentages were 35.45, 28.72 and 17.67, respectively.

I struggled to calculate what the Cheneys would have had to pay on their 2003 income under the tax law as it existed in 2000. The calculations get pretty hairy, what with the AMT and the capital gains preference. (The Bushes haven't had any capital gains to speak of in the last two years.) My best efforts result in a would-be 2000 tax on the Cheneys of $287,000, rather than the $248,000 they actually paid under the Bush tax cuts. That's about a $39,000 tax savings this year for the Second Couple from what they would have paid under Clinton.

Charitable contributions for the year? The Cheneys' jumped from about $120,000 to about $320,000, because Ms. Cheney's book royalties, which all go to charity, rose by that much. The Bushes' gifts to charity sagged very slightly -- from $69,925 in '02 to $68,360.

The Bushes stopped listing their daughters as dependents this year for the first time, but they weren't providing their parents with any tax benefit anyway, because the family makes too much money.

One mystery in my review of the Bush and Cheney tax returns is that they are partially incomplete. The forms released to the public do not include the many explanatory statements that were attached to the returns. As any IRS agent will tell you, those attachments are an integral part of the return, and they are covered by the perjury statement that the taxpayers sign. (Although the Bushes don't sign their returns -- they have someone at their bank do it for them under a power of attorney.) But the separate statements don't get published as part of the annual White House tax return disclosure ritual.

An intriguing item on the Cheneys' returns: they deduct their tax return preparation fees on Ms. Cheney's business schedule. That way Ms. C. doesn't have to pay 15 percent plus in self-employment (Social Security and Medicare) tax on the money she pays her tax accountants at KMPG. A smart move, but is it kosher?

UPDATE, 4/15, 4:15 a.m.: The plot thickens on the Cheneys' tax return preparation fee, just discussed. Several alert readers have commented to me off-blog about how much advantage the Cheneys might have gained by having that expense deducted on Lynne Cheney's business schedule, as opposed to listing it as an itemized deduction. There are a couple of advantages, and they appear to add up to even more than the 15-percent-plus in saved Social Security and Medicare taxes that I speculated about in the above post.

First of all, a correction on my part. It turns out that Ms. C. had already paid the maximum tax into Social Security for the year on account of her book royalties and her day job. And so she didn't save any Social Security tax by clever placement of the tax prep deduction; she wouldn't have owed any more Social Security tax than she actually paid, regardless. However, she did save Medicare taxes (just under 3 percent) by the deduction of the tax return prep fee on her business schedule.

More significantly, however, if that expense had been listed as an itemized deduction instead of a business deduction, it would not have been deductible by the Cheneys for AMT purposes, whereas it was fully deductible for that purpose (saving 28 percent of the deduction in tax) on the business schedule. Bottom line: The couple appears to have saved tax of more than 30 percent of the tax return prep fee by the way they listed it. (A couple of additional, indirect tax savings were suggested, but they'd be really tiny.)

Some of my correspondents join me in questioning the correctness of how the Cheneys played it. It's not a lot of money for tycoons like them -- maybe $1,000 or so in tax -- but I'd sure love to hear someone explain how the couple's tax accountants are entirely an expense of her consulting business.

One possibility is that the tax preparation fee listed on her business schedule is only part of the overall amount they paid to have their taxes done. Perhaps the rest was deducted as an itemized deduction (but not for AMT purposes) on those mysterious attachments that don't get released with the rest of the tax forms. Without those statements, I guess we'll never know.

Comments (21)

Jack, you and Robert Landauer of the Oregonian need to get your stories together. You describe the Alternative Minimum Tax (AMT) as "a special tax designed to prevent taxpayers from overdoing it on tax-favored items."

According to Landauer's column on 4/3, on the other hand, "[t]he AMT stealth tax shows that rich political donors are effectively waging class warfare on the rest of Americans."

Now I'm not comparing Bob Landauer's expertise on the tax law to yours, but Newsweek magazine also had a cover story recently calling AMT "The Dirty Little Secret" of the Bush tax cuts.

So could you kindly enlighten us? Is AMT is liberal snare to catch rich guys like Cheney, or a plutocratic plot to soak the middle class to pay for Bush's tax cuts for the rich?

Um, how about....both?
Here's Dan Gross' Moneybox column discussing the politics of the AMT:

Jack, care to explain the mechanics of it?

As for the AMT, Jack Robby, that's a long post for another day. I tried to describe it in a way that someone who never heard of it before would understand it. If it doesn't get changed soon, as Landauer points out, many more Americans are going to become painfully aware of it.

The slate.com article on AMT referenced above is a good example of what I'm talking about. After asserting, with no evidence, that "Republicans don't want to fix the AMT because fixing the AMT would require undoing their beloved tax cuts," the author provides a convenient hyperlink referencing three bills introduced in Congress to repeal AMT and one to index it to inflation.

All four bills were introduced by (you guessed it) Republicans.

I would welcome anyone to identify a Republican elected official who supports AMT.

JR, of course the GOP hates the AMT. The AMT costs guys like Cheney many, many tens of thousands. In his case, this year, $47,198 to be exact. The Republicans will be glad to let the AMT start impacting middle-class folks, as it will in a few years, and then when the outcry gets loud enough, repeal the AMT altogether. Cha-ching! Another $47K in take-home for Cheney.

Not wanting to fix it and not wanting to get rid of it are two different things. It's an absolutely routine legislative game to refuse to fix something you don't like so that its unintended consequences do less damage, because it's better to let it malfunction to the point where you can get rid of it entirely. The same thing happens with bills -- you don't amend a bill in committee that you hate in order to make it less awful. You let it pass, and then you blame the people who passed it over your objection and you argue for its repeal. It gets you a political point, and all it costs in the meantime is all the malfunctions -- which you can blame on the guy who passed it anyway.

Sad, but true.

In order to blame the Republicans for refusing to "fix" AMT, shouldn't you have to point to some Democratic proposal to fix it that the Republicans have blocked? I listened to quite a few of the Democratic Presidential Debates (I know, I'm a masochist) and I never heard any of them criticize AMT, much less propose changes to it.

(I wonder, if asked, how many of the candidates would have thought AMT refers to automated teller machines?)

I did hear the Treasury Secretary (in response to a question) criticize AMT and its increasing impact on middle class taxpayers when he was in Eugene a couple of months ago, but last time I checked, he's a Republican.

My answer to Democrats who want to attack AMT is "Go ahead, make my day!"

The Democrats, at least in Multnomah County, best stick with sticking the little guy. I made a little over $10K in our lovely city last year (no benefits), and even I get to write a check for 80 bucks to pay -- as nearly as I can tell -- for teachers' medical benefits to which they do not contribute and that their union refuses to negotiate.

Find me almost any Republican to vote for, or campaign to work on, and I'm yours.

Sorry .... Mannix DOESN'T count!

Actually Petey - 70% of your local tax went to schools mostly to pay for instructional days and to retain teachers. In Portland alone, 24 school days were retained and over 600 teaching positions (1 out of 5 teachers, preventing a 30% increase in class-size). I won't go into all the details of the mental health services you funded or assistance for low-income seniors or public safety.

If you want to get the facts and figures for school funding, check out an independent report at http://www.seacinfo.org/reports/SEAC_Report_3-18-04.pdf

And, yes the teachers health care is an issue in Portland at least. But, Portland also pays their teachers a very low salary in comparison with other districts in the area.

So feel good about your 80 bucks - it makes a difference.

Nice try but no sale, auggie. I don't feel good. And I will fight them at the polls and in the court of public opinion as far as I can and probably as long as I live.

I have quit bitching about Bill Gates though. His work for real schools is terrific.

(And do the math. How much difference do you think $80 makes on a benefit-free income like mine? Be real!

AMT is not so much a stealth tax as a cynical tax. AMT was designed to tax tax sheltered income that was effectively eliminated in 1986. Now tax shelters are our kids, our houses (property tax)and state and local income taxes.

I spoke to an former key aide to our local Congressman about this and it was apparent that Congress has no clue as to the impact AMT has on people. I prepared the tax return for the brother of this former aide. Marginal regular tax rate - 25%. AMT rate 26%. Thanks for the tax cuts but a lot more of us just are not going to see them.

> In Portland alone, 24 school days were retained and over 600 teaching positions

Not a chance. Are you saying that without the tax, Portland would have cut 24 school days and fired 600 teachers? No way in hell. They would have lost some days and fired some teachers, but nowhere near that many. Those are scare numbers designed to ensure the passage of the tax - and they obviously worked.

> (I wonder, if asked, how many of the candidates would have thought AMT refers to automated teller machines?)

At least Sharpton would have. At least he probably knows what the IMF is now.


I hope you're not seriously suggesting that the GOP hates the AMT simply because it means people like Cheney (who can sell off 10 mil. in assets in a single year) have to pay an extra 47k, because that would make you look like a very silly, very partisan hack.

Congress may have unwittingly enacted a flat tax when it approved the AMT. Since the AMT is not adjusted for inflation, at some point everyone will pay either a 26% or a 28% rate.

Citizens and fellow spinners:

There are many ways to spin a tax debate and a tax return (or else there would not be so many tax preparation services and armies of tax lawyers and accountants as well as commentators and social ethicists).

The most common spin is that nobody but "poor old me" pays as much and gets so very much little.

The second is that a "few very rich folks" get all the breaks while the poor pay for those breaks.

The fact is that the country is made of a lot of "poor old me" hard working singles and couples that pay between 21% and 27% of their gross income in federal income taxes. This sector that ranges between $60K and $80K in gross income pays roghly 20% of the total taxes (see IRS annual report) while the sector just above ($80K to $120K) pays another 25% and the sector above that ($120K to $150K) pays another 25% and the sectors below $50K pay little or nothing at all.

Of course, we could argue that the relative burden of wealth acquisition and management for each sector varies considerably by reason of life conditions and opportunities. This appeals greatly to the proposition (sophism?) that it is harder to be poor than to be rich and thus government must equalize the burden through tax incentives and other controls that benefit the poor and curb in the rich. Whether this results in a nation of poor and virtuous people or a country of rich and greedy people is something that has been bouncing around for the best part of three centuries with mixed results for the equality of poverty side.

Moreover, little old ladies who worked in factories, businesses, and schools for over 30 years now sit on investment portfolios of mutual funds and bonds and money market investments that now qualify them to be placed in the "millionaire" category. Of course, they should not have done that and trusted instead in the Social Security system that would reward them in their old age with $1,000.00 or $1,200.00 monthly payments greatly augmented with the wonderful benefits of Medicare and Medicaid.

There are a lot of these "old ladies" and in any tax-the-rich discussion, we must answer the question: What to do about retiree earnings from lifelong savings and investments?

Of course, these "old ladies" probably vote GOP and therefore must be punished as greedy, useful idiots that have become the wild variant that causes the failure of the equation of "income redistribution" and "fair" taxation.

While I am not an accountant and have stayed far from the corridors of legislative obfuscation and lawyering, my aunt is one of those "old ladies" and since her move to a senior citizens village, I have come to know a large contingent of people like her who scrimped, saved, and worked hard to build a retirement egg nest while educating their children and giving generously of time and resources to their communities. On paper, they are now "rich" and pay taxes like the "rich people" of tax equality debates; however, we pretend that they do not exist and that our fury is only directed to "other rich people" that need to be punished for their malfeasance in wealth acquisition. Yet, this brings up the rather nagging question of: how do we separate the "good" rich from the "bad" rich?

When we are truly and honestly ready to answer this in a manner that is non-partizan and rational, please let the world know.

My aunt would also like to know before her next birthday (92) and I would like to know also that I may be able to write the proper checks to the new Internal Revenue Tax Equalization Service from my prospective share of her hard earned legacy.

It is all so simple in the abstract yet messy in the details. Perhaps Teresa Heinz-Kerry has the answer.

I know that the responses will be either acrimonious attacks of a personal nature, hard and high sounding references to personal ignorance, or invective cliches from workers rallies around 1886. Nonetheless, it is good to say something just to let people know that the country has a large number of radical centrists that are very amused by the arguments between extremes.

Thank you and adieu.

It's always so humorous to watch class warfare jealousy in action, when you and me and everyone else on this board would love nothing more than to have annual incomes like President Bush and Vice President Cheney.

Everyone likes to hate the rich, but they'd like to be one even more.

"...At least Sharpton would have. At least he probably knows what the IMF is now."

Impossible Mission Force?

The following represents my informed opinion, Your mileage may vary.

I am a CPA, and have been licensed since 1998, specializing in small business taxation.

First of all, $1000 seems like a low price to do a tax return with the complexities of the Cheney's, especially seeing where they live. However, it is reasonable for just the Schedule C portion (income from self-employment)

That being said, it is possible to argue that without a Schedule C, the taxpayer would complete the return themselves, and the full cost to prepare the return is deductible as a business expense.

It sounds to me that they have deducted only a portion of the entire cost to prepare their return, and it was reasonable to do so.

Where's Kerry's return?

Phil: The $1,000 was my conservative estimate of the tax savings. The deduction, for "tax preparation, planning, and representation fees," was $4,113.

Thanks, Jack-That seems a little high, even for a complex return and CPA costs in DC, unless her info was brought in a shoebox (which I don't believe is the case). Arethtere other services provided? Maybe quarterly payroll tax returns, etc?
Another potential cost increaser is the "representation fees". If the taxpayer gets called in front of the IRS, any firm I know of would charge their highest rates. If the extra fees are related to the business, I would not hesitate to deduct on the Sch. C.


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