Why Jeb Bush Pays More Taxes Than He Could Have

The Republican’s tax returns indicate he saw the optical problem with paying an investor’s low rate long before the issue hurt Mitt Romney.

July 5, 2015, 5:03 a.m.

While Jeb Bush announced eight months ago that he was “actively exploring” a campaign for president, his tax returns suggest that he’s been at least passively considering a White House run for the past eight years—and he was willing to fork over possibly millions of dollars to preserve the option.

In the process, he has neutralized the sort of criticism that helped tank Mitt Romney by paying the highest federal rate possible, while buying the credibility to argue for tax reform that’s born of the shared experience with millions of Americans who believe that they’re paying the IRS too much.

“Either he’s being very stupid from a tax perspective or very smart from a political perspective,” said Roberton Williams, an analyst at the Brookings Institution’s Tax Policy Center. “If you had a tax adviser who set up your businesses the way his were, you’d fire him.”

Bush, in an essay that accompanied his release of 33 years of tax returns, explains his business career and takes a few shots at the tax code. “This release will show voters how I earned a living over the past three decades and how much of that living I had to give back to Uncle Sam. (Spoiler Alert: A LOT),” Bush wrote. “It’s time for a flatter, fairer tax code. The labyrinth of rules and special interest carve outs need to go.”

He spent much of his two terms in Tallahassee railing against taxes generally, and taxes against the “investor class” specifically—yet he made little effort to take advantage of a federal tax code that allows investment income from businesses to be taxed at a substantially lower tax rate than wage income.

The critical distinction is how Bush chose to classify the bulk of the $29 million he earned after leaving office in January 2007. Bush had no choice about how to report income he received from firms who considered him an actual employee. That money is taxed as wage income, as it for most Americans who file tax returns.

But the vast majority of Bush’s income came from his work as a consultant and from money he made in various deals. And Bush reported most of that as “Schedule C” income, which is taxed at the standard tax rates, rather than as distributions from his various businesses.

It was an expensive decision. At the very least, Bush could have avoided paying some $760,000 in Medicare taxes and, depending on how creatively he structured his businesses, might have paid a much lower dividend rate on his business income.

While dividends have been taxed at a maximum rate of 15 percent, and then 20 percent in the past two years, income has been taxed at a maximum 35 percent, and 39.6 percent more recently. The tax savings could have totaled in the millions, depending on how far his accountants were willing to push the envelope.

“He didn’t want a Romney issue,” said Dan Gelber, who, as a top Democratic leader of the Florida House, frequently sparred with Bush over his tax cuts.

In 2012, Romney’s campaign was hurt by news accounts detailing his effective federal tax rate: less than 14 percent, because most of Romney’s income came from investments, which in those years had a maximum tax rate of 15 percent. In contrast, Bush’s average effective tax rate in the seven years of returns since he left the governor’s office was just under 37 percent.

(Bush decided to pay the higher rates long before Romney’s trouble with tax returns, but after Democratic vice presidential nominee John Edwards faced similar questions in 2004.)

Bush’s campaign did not respond to National Journal queries. But Americans for Tax Reform, which advocates for lower and “flatter” taxes, defended Bush’s tax choices.

“Bush paid taxes at the appropriate tax rate for the type of income he earned,” said Ryan Ellis, the group’s tax policy director. “In 2012, Mitt Romney released tax returns with lots of capital gains and dividends and was attacked because the tax rate on that income was low. In 2015, Jeb Bush released his tax returns which overwhelmingly show ordinary income, for which he is accused of maliciously overpaying his taxes. Clearly, Republican candidates for president can’t win in the eyes of the establishment press. Either they follow tax law and pay too little or they follow tax law and pay too much.”

Bush’s release of all his tax returns back to the time his father became vice president in 1981 follows his earlier posting of a quarter-million of his work-related emails. Both are in keeping with his history of trying to get ahead of potentially damaging media coverage early, so that by the time the campaign is going in earnest, a reprise of such stories can be dismissed as old news.

In 1996, not two years after he’d lost his first race for governor to incumbent Lawton Chiles and long before declaring his candidacy for his second try, Bush and an aide visited Tallahassee to personally deliver thick three-ring binders to the statehouse press corps. Each binder was organized by tabbed dividers, and each section dealt with a topic that had drawn critical news coverage followed by a lengthy rebuttal explaining why the coverage was wrong.

During the 1994 campaign, Bush had been hammered by news stories about his many business deals, both for the profits they generated as well as the tax benefits they offered.

In 1984, for example, Bush was able to use losses from a property in which he’d earlier invested just $1,000 to reduce his taxable income by $22,000.

In 1988, Bush took write-offs of $95,000 from real estate projects to offset his $84,000 salary. (He wound up paying the IRS $7,521 that year only because of the alternative minimum tax, which was designed to prevent investors with significant earnings from paying nothing at all.)

“He certainly knows how to avoid taxes when he wants to,” Gelber said.

Bush’s tax-return effort also is designed to pressure his rivals, particularly Democratic front-runner Hillary Clinton. “One fun fact I learned in this process: I have paid a higher tax rate than the Clintons even though I earned less income,” Bush wrote.

A chart immediately below that line shows that while his average tax rate was 36 percent, the Clintons’ 2014 tax rate was 30 percent.

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