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April 2, 2008
Private Returns, Public Rewards: The Politics of Tax Records
Joseph J. Thorndike

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Joseph J. Thorndike is a contributing editor with Tax Analysts. E-mail: jthorndi@tax.org.

Presidential tax returns, including Franklin D. Roosevelt's from 1913 to 1937, as well as those returns released by the current candidates for president, are available from Tax Analysts at http://www.taxhistory.org.


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Two weeks ago, Sen. Barack Obama, D-Ill., released his tax returns and challenged Sen. Hillary Rodham Clinton, D-N.Y., to do the same. Clinton, whose personal tax records from her years as first lady are already public, promised to release more recent filings sometime during this filing season. (Clinton released her tax returns after this article was submitted for publication. For coverage, see Doc 2008-7564 or 2008 TNT 67-4.) Meanwhile, Sen. John McCain, R-Ariz. -- who has released none of his tax returns to date -- has promised that he, too, will release something soon.

Media comment has focused on the Clinton foot-dragging (and, to a lesser extent, on McCain's delay). But the fracas has obscured a more fundamental question: Should we care?

Well, yes. And not just for the voyeuristic thrill that tax returns provide (or voyeuristic creep-out: recall candidate Bill Clinton's itemized deduction for donating used underwear to the Salvation Army -- some good deeds are best left unadvertised). Voters should care about a candidate's tax returns because they provide a valuable window on his or her integrity.

In the normal course of events, candidate returns are unlikely to reveal any sort of malfeasance. In our modern, tightly scripted, hyperscrutinized political environment, we can be fairly sure that no candidate will release a return with major problems. Sure, they may get tripped up on minor issues, like when Sen. John F. Kerry, D-Mass., miscalculated tax on the gain from a sale of artwork. But today's candidates are simply too careful to make serious errors.

After all, no one wants to be the next Richard Nixon. In 1973 Nixon ignited a firestorm of protest when he was revealed to have claimed a large and dubious deduction for the donation of his vice presidential papers to the National Archives.

But a candidate's tax returns can still be important, even if they don't include a smoking gun. Public returns can reveal points of inconsistency between a candidate's public rhetoric and his or her private finances. Which is no small thing, especially when a candidate makes a point of targeting tax avoidance.

New Deal, New Deductions

Consider, for instance, the tax returns of Franklin D. Roosevelt. The returns were not released during FDR's presidency, but had they been, they would have proved an embarrassment. Tax Analysts has recently acquired from the National Archives copies of the tax returns that Roosevelt filed between 1913 and 1937. And as a group, they reveal something striking: Roosevelt -- a vicious and moralistic scourge of tax avoiders everywhere -- had a penchant for minimizing his own taxes.

Throughout his 12 years in office, Roosevelt was a frequent critic of Americans who tried to avoid taxes, even using legal means. "Mr. Justice Holmes said, 'Taxes are what we pay for a civilized society,'" Roosevelt told Congress in 1937. "Too many individuals, however, want the civilization at a discount."

Roosevelt reserved special scorn for the "clever little schemes" devised by tax lawyers, insisting that they posed a threat to the tax system, and even to society as a whole. "In this immediate problem the decency of American morals is involved," he declared. "The example of successful tax dodging by a minority of very rich individuals breeds efforts by other people to dodge other laws as well as tax laws."

Roosevelt's 1937 message on tax avoidance decried a variety of popular techniques, including the use of overseas and domestic personal holding companies, the creation of multiple trusts for the support of family members, and the incorporation of money-losing country estates and personal yachts.

Such bombast carried the day in 1937, when FDR pushed a tax bill through Congress that tried to eliminate some of the more glaring loopholes. Other high points in Rooseveltian tax policy -- including the Wealth Tax Act of 1935, the undistributed profits tax of 1936, and the tax bill veto of 1944 -- were also rooted in a conviction that rich Americans were gaming the tax laws.

But Roosevelt's tax returns reveal him to be something of a hypocrite. At various points, both before and after his election to the White House, he indulged in the sort of tax avoidance that he claimed to find so objectionable.

For instance, Roosevelt repeatedly urged Congress to end the tax-free treatment of interest on state and municipal bonds. The special treatment accorded to those financial instruments, he told Congress in April 1938, "has created a vast reservoir of tax-exempt securities in the hands of the very persons who equitably should not be relieved of taxes on their income." Congress should act to end the injustice, he declared.

Yet just a month before, FDR had filed a tax return indicating that he owned some $17,000 in tax-free bonds. Defenders of the president might insist that he was doing nothing wrong; after all, the tax-free status of those bonds was a deliberate and long-standing element of the tax law. But Roosevelt himself dismissed those legalistic arguments:


    Methods of escape or intended escape from tax liability are many. Some are instances of avoidance which appear to have the color of legality; others are on the borderline of legality; others are plainly contrary even to the letter of the law.

    All are alike in that they are definitely contrary to the spirit of the law. All are alike in that they represent a determined effort on the part of those who use them to dodge the payment of taxes which Congress based on ability to pay. All are alike in that failure to pay results in shifting the tax load to the shoulders of others less able to pay, and in mulcting the Treasury of the Government's just due.


Roosevelt's income from tax-exempt bonds was not grand; it shrinks to insignificance when compared to the exempt income reported by the nation's richest taxpayers. Still, his fondness for investing in those bonds stands in stark contrast with his public pronouncements on the subject.

Executive Compensation

An even more striking example of Roosevelt's tax avoidance involved a technique that only a president could love. During his first term in office, FDR repeatedly claimed that he was exempt from the high tax rates on personal income that Congress had enacted -- and Roosevelt had approved -- in the revenue acts of 1934 and 1935.

In a series of letters to internal revenue officials, Roosevelt insisted that he could not be taxed at the heavy rates imposed on rich taxpayers during the mid-1930s. Article II, section 1 of the Constitution forbids any reduction in the president's compensation during his term in office, Roosevelt pointed out. Since the new rates enacted in 1934 and 1935 effectively reduced that compensation, they could not be applied to the president's salary.

Roosevelt came late to this unusual (and to my knowledge, unprecedented) interpretation of the tax laws. In 1934 he filed his return using the new, higher rates enacted that year. But he later applied for -- and apparently received -- a refund to correct the overpayment. (See next page.) In subsequent filings, he calculated his taxes using rates in effect in early 1933.

Roosevelt apparently had the law on his side; his records show no challenge from the Bureau of Internal Revenue. But the maneuver was surely inconsistent with Roosevelt's public rhetoric about the fiscal responsibilities of wealthy Americans. If he felt compelled to abide by the letter, rather than the spirit, of the law, then he might have chosen to make a voluntary contribution to the Treasury. But his refund claim suggests that he was not inclined to be quite so generous with the fisc.

After winning reelection in 1936, Roosevelt began paying taxes at the rates effective on his inauguration day in 1937, finally shouldering the same burden he had placed on high-income taxpayers during his first term.

Public Rhetoric, Private Finance

Taken as a whole, Roosevelt's tax returns show a scrupulous attention to detail. Many of the forms seem to have been completed in his own hand, and he clearly played an active role in filing them (especially before he was elected president). In general, he seems to have been a conscientious taxpayer. "His tax positions seem consistent with someone who is compulsive and meticulous," observed Norman S. Solomon, a CPA who serves on the American Institute of Certified Public Accountants Tax Executive Committee and who examined the Roosevelt returns for Tax Analysts.

But if Roosevelt met the legal standard for tax compliance, he fell short when judged by his own standards of tax morality. "It is enlightening," wrote historian Mark Leff in his study of New Deal taxation, The Limits of Symbolic Reform, "to attempt to square Roosevelt's distaste for tax avoidance with his own tax forms." To be blunt, it can't be done.

The disconnect between public rhetoric and private finance is notable and important, both for Roosevelt and his successors in the White House. It seems fair to hold presidents -- and candidates for that position -- to the same standards that they trumpet from the rostrum. If candidates urge charity (and especially if they call for tax reforms that seek to encourage charitable giving), then we have a right to expect that their returns will show charitable contributions. If they criticize foreign corporations for moving jobs overseas (and call for penalties on those that do), then we have a right to know if they are investing in those corporations.

Public tax returns can provide that sort of information. They are not any sort of panacea; they will not eliminate, or even sharply reduce, hypocrisy among candidates. But they are a step in the right direction, and one that Americans have a right to expect.