Mitt Romney's Tax Deduction for Rafalca

The controversy over Mitt Romney's tax returns seems to have died down. Romney resolutely refused to reveal more than two years' returns and -- as he probably expected -- the media, unable to rattle the Romneys, eventually got bored, lost interest, and moved on to other matters. One of the odder aspects of the controversy was the matter of the tax deduction that Romney took for the $77,731 costs of the care and upkeep of Rafalca, the mare that competed in dressage at the London Olympics and is owned by Ann Romney and a few of her associates.

After the initial breathless reports, it turned out that the actual tax savings for Romney in 2010 was a mere $49 -- see the last line in the screen shot of Romney's tax returns in this video. However, as Janet Novack, who writes in Forbes magazine on tax issues, has reported, the $49 tax reduction that the Romneys have received in 2010 was just the beginning:

The Romneys will likely get to claim all the horse losses later, even if they never make a dime from Rob Rom—in other words, the taxpayers will end up subsidizing Mrs. Romney’s love of dressage, only on a deferred basis.

The Romneys had relatively low income in 2010 from "passive activity" (don't ask!), which explains the small deduction they received in 2010. But, if and when they earn income from "passive activity" in the future, the rest of the $77,731 deduction will come through. Here's Janet Novack again:

But you don’t forfeit the passive losses you can’t use. Instead they’re “suspended” and can be carried forward and used in future years to the extent you have income from other passive activities. Moreover, when you sell all of a money losing passive investment, any unused losses from it are liberated and can be claimed against non-passive taxable income. If Mitt wins and Ann sells her share of Rob Rom, their suspended horse losses could, for example, be deducted against Mitt’s $400,000 Presidential salary.

Aside from the media controversy over the exact amount of the tax deduction received for the Romney horse, the media coverage has focused on what all this says about the Romneys' wealth and taste for the high life. But, as far as I know, nobody has remarked on whether it was proper or ethical for the Romneys to claim this deduction.

It is clear that the Rafalca deduction was legal. But was it ethical? How can one even figure out if the deduction was or wasn't ethical?

I believe that it was not ethical for the Romneys to take this tax deduction. Look, we all know that tax codes -- long and detailed though they are -- are never written in such detail as to fully and accurately reflect the views of the legislators who are ultimately responsible for the tax code. Given that there is many a slip between cup and lip in the writing of the tax code, it is incumbent upon every taxpayer to ask himself or herself honestly, "I know that it is legal for me to take tax deduction X. But do I honestly believe that the legislators -- who probably gave some pretty rough directions to the tax law specialists who actually drafted the tax code -- really wanted someone in my position to get this tax break?" And if the honest answer is "No," then it is morally necessary that we not claim the tax deduction, even though claiming it would be legal.

To me at least, it is quite clear that US lawmakers did not intend the tax code to be used by a family with net worth upwards of $200 million to claim a tax deduction for a dressage horse's care and upkeep. I am pretty confident that even the Romneys would actually agree with me on this issue. Who wouldn't?

It is a pity that Mitt Romney seems to see the tax code as something to be gamed. Life is not merely about staying within the law; we make ethical choices at every step.