[StBernard] At 102%, His Tax Rate Takes the Cake

[Westley Annis]

At 102%, His Tax Rate Takes the Cake

By JAMES B. STEWART | New York Times – Fri, Feb 3, 2012 11:32 AM EST

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 tax 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 in federal, state and city income
taxes and 74 percent of my taxable income. (Adjusted gross income — your
total income minus retirement plan contributions, tax-exempt interest and
other specified exclusions — is usually higher than taxable income, which is
adjusted gross income minus your personal exemptions and itemized
deductions. So taxes as a percentage of taxable income are almost always
higher.)

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.

 “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 Robert Willens, a tax expert and New York attorney, 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.

Because Mr. Ross has so many deductions, his tax as a percentage of adjusted
gross income, as opposed to taxable income, is 20 percent, which is much
lower than mine. Still, all those deductions, such as interest expense, are
money out of Mr. Ross’s pocket, which is why he has had to draw on his
savings to pay his taxes. Mr. Willens made the argument that because of
that, taxable income may be a better comparison for measuring the tax
burden. In any event, by either measure Mr. Ross pays a higher rate than Mr.
Romney

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 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.”