The 2004 presidential primaries begin this month and, as always, the campaign is sure to tell us more than we ever wanted to know about the candidates, without necessarily telling us much at all.
One set of stories will cover the April release of federal income tax returns for President Bush, Vice President Richard Cheney and their leading challengers. We will hear the usual dry rehash of who earned how much, how much he paid in taxes and how much he gave to charity. We usually learn nothing of great value from those news reports.
That’s too bad. Tax returns may be one of the few sources of information that a skilled political operation cannot spin these days, at least not without greater-than-average risk. If you know something about tax law and personal finance, a tax return offers interesting insights into the way a candidate handles his business affairs and personal dealings with the government. Most of these insights, however, require some reading between the lines.
The annual news stories about presidential tax returns are written on deadline and seldom offer that type of analysis. So I recently curled up with a 3-inch stack of paper comprising every presidential tax return ever made public, as well as information released by the current vice president. You can find these returns at www.taxhistory.org/presidential/default.htm.
This article looks at the returns that President George W. Bush and Vice President Cheney have released. In the next issue of Sentinel, we will delve into some interesting disclosures, and a mystery or two, from the returns of several past presidents.
George W. Bush
President and Mrs. Bush do not sign their own tax returns. In fact, there is no indication that they even look at their tax returns. The Bushes’ returns have been signed under a power of attorney by Nancy Felton-Elkins, a vice president at Northern Trust Co. Every other recent president has signed his own return, except one: The current president’s father, George H.W. Bush.
Generally, taxpayers are required to sign their own returns. Treasury Reg. 1.6012-1(a)(5) provides that a return can be signed by an agent if, because of disease or injury, the taxpayer is unable to do so; or if the taxpayer is continuously absent from the United States for at least 60 days prior to the due date; or if the taxpayer seeks Internal Revenue Service permission and the IRS district director finds “good cause exists for permitting the return to be so made.”
The current administration has never explained why George W. and Laura Bush do not sign their own returns. The White House Office of Media Relations did not respond to my request for comment. However, we can guess that President Bush is following the lead of his father. George H.W. and Barbara Bush released copies of their requests to the IRS for permission to have their trust officer, who was John Whitmore of Bessemer Trust Co., sign their returns. The first President Bush asserted that the terms of a blind trust established under the Ethics in Government Act of 1978 provided that “the Trustee shall be responsible for preparing and filing our federal and state income tax returns.” The IRS accepted this as “good cause” and permitted Mr. Whitmore to sign the Bush tax returns.
This IRS acquiescence puzzles me. Nothing in the Ethics in Government Act prevents a president from signing his or her own tax return. The ethics law applied to Presidents Carter, Reagan and Clinton as well as the two Bushes. Messrs. Carter, Reagan and Clinton all had blind trusts — as required under the act, so the president cannot see how his official decisions might affect his personal investments — but all signed their own returns. Vice President Cheney is subject to the Ethics in Government Act, but signs his own return, as well.
The Bush tax returns include a lot of information about income and expenses arising outside the blind trust. A trustee who is familiar only with the trust’s affairs is not in a position to know whether the non-trust information reported on the return is accurate or complete. I very much doubt that the IRS would allow a similarly situated private citizen to have a trustee sign his or her return, and thus I fail to see the “good cause” for the dispensation apparently granted to the Presidents Bush.
In any event, George W. and Laura Bush might want to take a closer look at their returns. There are signs that the Bush family finances are not being run as tightly as they might.
For instance, the president is taxed at the highest marginal tax rate, about 39% in 2002. He is not subject to alternative minimum tax (AMT), largely thanks to his domicile in Texas, which does not have a state personal income tax. Usually, in this situation, it makes sense to invest in tax-exempt municipal securities rather than taxable securities. Yet the Bush tax returns show more than $400,000 in each recent year of taxable interest, and no tax-exempt income.
The president has not been diversifying his investments too thoroughly, either. The absence of any foreign tax credits or deductions implies that the president has not invested in any overseas stocks. My colleagues and I, like most financial planners, believe foreign stock markets are a useful counterweight to American investments. On the other hand, we don’t face the frustrations that the president faces in dealing with certain members of the United Nations Security Council.
Then there is the Bush “ranch” in Crawford, Texas. It seems to me that a real ranch ought to have a profit motive and report its income and expenses to the IRS. Otherwise, what you have is not really a ranch; it is a house with a big front yard and some large bovine pets running around. The Bush returns for 2000 through 2002 do not show any income or expense for the Crawford property. It is possible, though unlikely from a tax planning perspective, that the ranch files a separate tax return as a C corporation. If that is the case, however, the Bush administration has not acknowledged that part of the president’s financial data is being withheld. On this point, also, the White House did not respond to our request for comment.
In a break with past practice going back to President Carter, George W. Bush has not released the supplementary statements that provide details of many entries on his tax returns. As a result, we do not know what accounts for about $29,500 of miscellaneous deductions on his 2002 return, the source of some $84,000 in capital losses he realized that year (though presumably much came from the blind trust), or any other disclosures the president may have made.
Richard Cheney
The vice president’s financial advisors seem to have sharper pencils than do the president’s. Like Mr. Bush, Mr. Cheney hails from a non-income-tax state (Wyoming), avoids AMT and thus is taxed at the highest federal rate. Unlike the president, Mr. Cheney obtains nearly all of his interest income from tax-exempt sources. He had nearly $560,000 in municipal bond interest in 2002. Most of that came from the Vanguard Intermediate-Term Tax-Exempt Bond fund, which indicates that Mr. Cheney had about $11 million invested in that fund. (Mr. Cheney received more than $30 million in 2000 when he left Halliburton Co., where he had been chief executive officer. The Cheneys released only a summary of their 2000 return upon taking office.)
Some positions on the Cheneys’ 2002 return seem a little aggressive. They reported no tax preparation expenses as itemized deductions. Instead, it appears that all of the Cheneys’ $8,000 in tax preparation fees and $10,000 in “other professional fees” were allocated to Lynne Cheney’s political consulting business, where the expenses reduced her self-employment taxes. Most taxpayers would allocate tax preparation and, depending upon their nature, other professional fees between itemized deductions and business purposes, rather than 100% to business.
Mrs. Cheney did not pay Social Security taxes on a $125,000 book advance from Simon & Schuster. She deducted the cost of a computer and some other expenses against that advance, and then noted in the tax return that the net income of more than $119,000 was “donated to charity on a tax neutral basis.” This apparently accounted for nearly all of the $121,000 in charitable contributions the Cheneys claimed in 2002.
Usually, book advances and other author royalties are treated as compensation subject to Social Security taxes. This is how Hillary Clinton reported her royalties for her book, It Takes A Village. Also, Mrs. Cheney’s claim that the proceeds from her advance were donated to charity seems to overlook the fact that the computer is, presumably, hers to keep.
Among recent White House residents, it appears that only Mrs. Clinton paid Social Security tax on her book royalties. George W. Bush did not pay the tax on $75,000 of advance book royalties received in 2000, apparently for the president’s 1999 campaign book, A Charge to Keep. Neither did the first President and Mrs. Bush on book royalties they received while in the White House – including nearly $900,000 from the best-selling Millie’s Book, the story of a day in and around the Oval Office as dictated to Barbara Bush by the First Pooch. The senior Mrs. Bush donated the net royalties to her Barbara Bush Foundation for Family Literacy.
