Friday, February 03, 2012

At 102%, His Tax Rate Takes the Cake By JAMES B. STEWART


February 3, 2012

At 102%, His Tax Rate Takes the Cake By 

Meet Mr. 102%.
James Ross, 58, is a founder and managing member of Rossrock, a Manhattan-based private investment firm that focuses on commercial real estate and distressed commercial mortgages. “I realize I am very fortunate, and in fact I am a member of the 1 percent,” Mr. Ross wrote in an e-mail. His résumé is studded with elite institutions: Yale, Columbia Law School and stints at the law firms Cravath, Swaine & Moore in New York and Holland & Hart in Denver. Since his company fits the category of private equity, he even has carried interest, the kind of incentive compensation that enabled Mitt Romney to pay such a low tax rate.
Yet Mr. Ross told me that he paid 102 percent of his taxable income in federal, state and local taxes for 2010. “My entire taxable income, plus some, went to the payment of taxes,” Mr. Ross said. “This does not include real estate taxes, sales taxes and other taxes I paid for 2010.” When he told friends and family, they were “astounded,” he said.
In the midst of a national debate over tax rates and policy, I lifted the veil last week on my income tax rates for 2010, a year in which I paid 37 percent of my adjusted gross income (total income minus things like retirement contributions) in federal, state and city income taxes and 74 percent of my taxable income (after deductions like state and local taxes).
I was dismayed by the comparison to Mr. Romney — who paid 13.9 percent of his adjusted gross income of $21.7 million and 17.5 percent of his taxable income of $17.1 million — as well as by the possibility that I paid a higher tax rate than just about anyone. So I invited readers to send me e-mails disclosing their tax rates and circumstances.
I was deluged with submissions, including many people who pay a higher rate than I do. But at 102 percent, Mr. Ross was in a category of his own.
That doesn’t mean Mr. Ross pays more in taxes than he earns. His total tax as a percentage of his adjusted gross income was 20 percent, which is much lower than mine.
That’s because Mr. Ross has so many itemized deductions. Since taxable income is what’s left after itemized deductions like mortgage interest, charitable contributions, and state and local taxes are subtracted, it will nearly always be smaller than adjusted gross income and demonstrates how someone can pay more than 100 percent of taxable income in tax. Mr. Ross must hope that his interest expense will pay off down the road and generate some capital gains.
Still, all of Mr. Ross’s itemized deductions are money out of his pocket, which is why he’s had to draw on his savings to pay his taxes. Robert Willens, a tax expert and New York attorney, made the argument that taxable income, therefore, may be a better basis for measuring the tax burden.
In any event, by either measure Mr. Ross pays a higher rate than Mr. Romney.
“I had no idea I was paying such a high rate,” he told me when we spoke this week. “I had trouble believing this was possible. I called my accountant, and I said, ‘Do you realize I’m paying every penny I have in taxable income? I’m dipping into savings to pay my income tax.’ He said, ‘It’s unfortunate, but at your income level’ ” — with high earned income and large itemized deductions that Mr. Ross can’t take advantage of — “ ‘that’s just the way it is.’ ”
Mr. Ross’s plight illustrates something that came through in nearly every response and cuts across nearly all income levels: the disparities of the tax code don’t just pit rich against poor or middle class. It taxes people within the same income brackets at grossly unequal rates. “I cannot help but reflect on the unfairness of the current tax regime,” Mr. Ross wrote. “Why should I pay 102 percent of my taxable income in taxes when others, with far greater wealth than mine, pay a fraction of that?”
I asked Mr. Willens if such a thing were possible, and he said it was. “It’s entirely within the realm of possibility,” he said. “I can’t recall any clients quite that high, but I’ve had people come close.”
How could Mr. Ross pay so much? I thought I was the victim of a perfect storm of punitive tax policies, but Mr. Ross’s situation is worse.
Like me, he lives and works in New York City, which all but guarantees a high tax rate. Nearly all of his income is earned income and thus fully taxable at top rates. (He said that’s not always the case, but given the recent dire condition of real estate, in 2010 he had few capital gains and his carried interest didn’t yield any income.) Unlike me, he can’t make any itemized deductions, which means his adjusted gross income exceeds $1 million, the level at which New York State eliminates all itemized deductions, except for 50 percent of the value of charitable contributions. Mr. Ross said he gave 11 percent of his adjusted gross income to charity.
That means Mr. Ross can’t deduct any interest expense on the money he borrows to finance his real estate investments, which is substantial, nor can he deduct any other expenses or other itemized deductions except for part of his charitable contributions. This means he pays an enormous amount in state and local taxes. Since those are among the deductions that are disallowed when computing the federal alternative minimum tax, Mr. Ross is in turn especially hard hit by the A.M.T.
Mr. Ross said he asked his accountant what he could do. “He said, ‘Fire everyone here and move to Florida,’ ” according to Mr. Ross. He employs 10 people in his New York office.
Mr. Ross may be a member of the 1 percent, but many people who responded and said they paid high tax rates weren’t. Eliana S. Rivero is a professor emeritus at the University of Arizona who told me she gets by on Social Security, a TIAA-CREF pension fund and a small amount of royalty income. She said she paid just over 26 percent of her adjusted gross income in income taxes.
“I reacted the way you did when Romney’s tax status was revealed: I went to my calculator,” Dr. Rivero wrote.  “Much to my dismay and, yes, outrage, I pay almost double the tax rate he does. And I promise you, I am very far from the 1 percent crowd!!!
“I worked for 45 years in my chosen profession, helped educate quite a few of the present-generation college faculty, received several teaching and scholarly awards, and yet my government taxes me right and left for the moderate wages I earned but lets the wealthy get away with paying proportionately less than I do. I truly wouldn’t mind it so much if my taxes went to pay for schools and bridges and roads but when they go to wars and loopholes for the mega-rich, I see red!”
A disproportionate number of high-rate taxpayers appear to be self-employed and many are professionals, such as lawyers, doctors, dentists and architects with mostly earned income rather than dividends and capital gains. Some are in the upper 1 percent, but most aren’t. Architects, who as a group may be the most underpaid profession relative to their education, talent and responsibility, seem especially disadvantaged by the current tax code.
Daniel Kelley is an architect who wrote from Philadelphia. “My wife and I have a 20-year-old architecture firm employing 20 to 30 full-time professional people,” Mr. Kelley said. “In 2010, we paid 31.3 percent federal taxes on our adjusted gross income. We paid 37.5 percent federal, state, local taxes on our adjusted gross income. If our practice was in New York, I imagine the latter would approach 45 percent. Instead of tax breaks for people who make a living from their money, perhaps there should be reduced taxes for those of us who have small businesses and employ Americans. I don’t necessarily mind the very rich making money, but if they don’t pay a fair tax, then they are stealing from the rest of us.”
Journalists and authors were also well represented. Jeffrey Bennett, author of “Math for Life” and numerous other books, reported that he paid 26.8 percent of his adjusted gross income in federal taxes, topping my 24 percent rate, but because he lives in Colorado, his total federal and state burden is lower than mine though still far higher than Mr. Romney’s. Ironically, a chapter in Mr. Bennett’s book discusses the “insanity of our current tax policies,” he said. “And despite our high rate, you can mark us down in the category of people who believe our rate should be increased. After all, it’s either us paying it or our children, and it’s not right to pass it on down the line.”
And for those of you who questioned how I could be a business columnist and yet be such a sap, James Cramer, the host of “Mad Money” on CNBC and founder of the financial Web site TheStreet.com, disclosed that he paid a higher rate than I do. He forwarded an e-mail from his accountant estimating that he paid 45 to 50 percent of his adjusted gross income in income taxes in 2010. Mr. Cramer’s taxes are especially high — and complicated — because he lives in New Jersey and works in New York and New Jersey, so he pays income taxes in both high-tax states (and gets a credit on his New Jersey return for his New York taxes). Most of Mr. Cramer’s income is earned, and thus is fully taxed. Although he had capital gains, they were offset by losses. “The best way to have everyone pay their fair share is to tax all income (whether earned or unearned) at the same rates,” his accountant, Jeffrey Rosenthal, said.
One thing that emerged loud and clear is that a large swath of hard-working people are paying a high rate and are furious about it — not because they object to paying taxes, even high taxes, but because so many people, even billionaires, pay at a much lower rate than they do.
The tax code, Dr. Rivero wrote, “is written to favor the rich, who have not created all those jobs they were supposed to generate.”
The rich themselves are some of the most distressed. “None of the dialogue about taxes has anything to do with fairness,” Mr. Ross lamented. “Certain rich people are paying way more than their fair share and other rich people are paying a lot less. I’d like to see a conversation take place along nonideological lines where everyone is asked to pay their fair share, where everyone makes some payment, even if it’s one dollar. Everyone I know is so disgusted. People aren’t stupid. They know what’s going on. At the end of the day, the system is broken.”

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