Teresa Kerry's Taxes

washingtonpost.com
Teresa Kerry's Taxes

By Michael Kinsley

Sunday, October 24, 2004; Page B07

Teresa Heinz Kerry released her 2003 income tax Form 1040 the other day, and the right-wing commentariat claims to find her tax situation deeply ironic. On income of over $5 million, she paid federal income taxes of just $627,150, or 12.4 percent. As a Wall Street Journal editorial last Monday put it, this "means she is paying a lower average rate than nearly all middle-class taxpayers." This was declared to be a devastating comment on John Kerry's tax plans. It shows that they "are much more about a revenue grab than they are about tax justice," the Journal put it. The point is echoing in talk-radioland. It is another example of what I wrote about last week: the fantastic ability of Bush supporters to turn anything into dirt.

John Kerry says that rich people pay too little in taxes. His proposal is to raise taxes on incomes over $200,000 and cut taxes for the middle class. Maybe this is a terrible idea. But Teresa Kerry's tax returns certainly seem to illustrate, not contradict, the case for her husband's tax proposal. By contrast, if you're offended by how little Teresa Kerry pays in taxes, you might consider President Bush's tax cuts, which have saved her many millions.

More than half of Teresa Kerry's 2003 income was interest from tax-exempt bonds. The Journal hilariously described these on Monday as "the kind of investments that rich people can afford to hire lawyers and accountants to steer their money into." And the paper predicted that "mega-millionaires such as Mrs. Kerry" will avoid her husband's higher taxes through "tax shelters" like this one, leaving ordinary $200,000 taxpayers to shoulder the burden.

In fact, tax-exempt bonds are hardly an exotic tax-avoidance technique requiring lawyers and accountants. Anyone with a hundred bucks can buy into a mutual fund of tax-exempt bonds with a simple call to Fidelity or Charles Schwab. The Wall Street Journal got it precisely wrong: The remarkable thing about Teresa Kerry's tax return is that this fabulously rich woman apparently has most of her income-producing wealth stashed in an utterly mundane and non-exclusive form of investment.

The Journal returned to Teresa's taxes on Wednesday, declaring carefully that a "huge reader response" had been "helpful in illuminating the issue." This second bite at the apple begins by noting that Teresa Kerry's investment income is exempt from the Social Security payroll tax. "This is fine by us," the editorial says. Next, the editorial concedes that "millions of other Americans" invest in tax-exempt bonds," and "we have nothing against" that either.

Well, what are they against? Why has the Wall Street Journal devoted two accusatory editorials to Teresa Kerry's taxes? "Our main point is that [investing in tax-exempt bonds] is one more advantage Mrs. Kerry would have over working stiffs" in shouldering the burden of her husband's tax increase. But (a) these would be working stiffs who earn more than $200,000 a year, and (b) the Journal has just said it has "nothing against" this.

The paper notes that many people with $200,000 incomes have "big bills" (meaning financial obligations, not cash under the mattress), and they haven't "been lucky enough to marry rich" and "live off tax-exempt income." It notes again that "the super-rich" can "afford to hire lawyers and accountants" to create complex tax shelters. But it provides no example of Teresa Kerry having done this.

The right-wing commentariat, and the Wall Street Journal in particular, are not against the rich or the super-rich. They are not against people avoiding taxes. They are just against Teresa Kerry. For a person that rich to be a Democrat seems somehow like cheating.

If it matters, in this stew of empty innuendo, Teresa Kerry's effective tax burden is actually much higher than 12.4 percent. Tax-exempt bonds are a form of subsidy by the federal government to local governments, which use them to raise money for projects such as highways and convention centers. The feds don't collect income tax on the bond interest, and so investors are willing to accept a lower interest rate. But it is misleading to measure such investors' tax burden by just the taxes they actually pay. The interest they give up is part of the tax burden too. That burden presumably is less than the burden of taxes would be if they invested in normal, non-tax-exempt bonds. But it's not zero.

In computing Teresa Kerry's income, her critics include both her taxable income and the income she receives tax-exempt. That is reasonable enough. But in computing her tax burden, they include only the taxes she pays, which is not reasonable.

A rough estimate is that Teresa Kerry's $2.78 million in tax-exempt income would be more like $4 million if she invested the same amount of money in taxable bonds of similar risk. If you consider the difference -- $1.22 million -- as income she received and then paid as taxes, you get a tax burden of $1.84 million on income of $6.29 million, or a fraction under 30 percent. That is higher than the average tax burden on the top 1 percent of taxpayers and double the burden on all taxpayers, according to a chart that ran with the first Journal editorial. So whatever point Teresa Kerry's critics were making is wrong as well as utterly obscure.

The writer is editorial and opinion editor of the Los Angeles Times.