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A look behind Romney's taxes
The U.S. tax code can be a cumbersome beast. How did Mitt Romney manage to pay roughly 15 percent in taxes last year?
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Kai Ryssdal: The rest of us have a good two and a half months 'til tax time. For Mitt Romney, it came last night.
The Republican presidential hopeful did what you can only call a midnight data dump. He gave his 2010 and 2011 returns to a couple of media organizations, then the candidate held a conference call this morning. The details you've probably heard: $45 million or so in income the past two years, taxed at something less than 15 percent.
The U.S. tax code being a cumbersome beast, we've called an expert for help in figuring out what all the numbers really amount to. Tiffany Couch is a forensic accountant in Portland, Ore. Nice to talk to you again.
Tiffany Couch: Nice to talk to you.
Ryssdal: So Mr. Romney and this 13.9 percent effective tax rate that we've been reading about all day. What exactly does that mean?
Couch: That is a simple tax calculation where you take the total amount of tax Mr. Romney paid and you divide that by the total income that he earned.
Ryssdal: Simple math, right? Simple math.
Couch: It's simple math. In 2011, he earned approximately $20 million. He paid a total amount of tax of approximately $3 million. When you divide that $3 million by the $20 million, you get an effective tax rate for 2011 of about 15 percent.
Ryssdal: OK but I thought we have what we call a marginal tax rate system in this country -- that is, you have tiers and then the more you make, the more you pay on that extra money.
Couch: That's correct. We do, we have tax tables. If you look at the back of the booklet you get with your 1040 form, there are all those tax brackets that you see. If you make a certain amount of money, you have a certain amount of tax that you pay. And the more that you make, the more that you have to pay into the IRS.
Ryssdal: OK, but what happened here? Because Mitt Romney is like off the tax table, he's way up there.
Couch: Yes, he's way up there. But if you actually look at the types of income that he earned, it mostly came from capital gains, interest and dividend income, and all of that is taxed at a much lower or a capital gains rate for about 15 percent.
Ryssdal: All of this, though, we should point out, is entirely legal. I mean, he got some good accountants and said, 'listen, help me do what I've got to do.'
Couch: Well, you know, it's a couple of things. He's used his money to earn money and invest that money -- that is a great tax strategy. And not only is he growing his money obviously because he had gains, but his tax on those gains is much lower than had he earned that in wages.
Ryssdal: Everything we've been talking about, Tiffany, are federal tax rates, right? What are we missing here? There's state, there's local, there's Social Security, there's payroll taxes. I mean, there's a whole bunch of other stuff that we're not seeing in this Romney story today.
Couch: Well sure, it becomes quite complicated.
Ryssdal: Nuh-uh, tax codes? Complicated?
Couch: Oh, you know, maybe just slightly. There's state taxes, there are local taxes, we haven't even talked about Social Security and the payroll types of taxes. So there are lots of other taxes that Mr. Romney may be paying that we aren't privy to or really isn't part of this equation today.
Ryssdal: Tiffany Couch, a forensic accountant at the Acuity Group in Portland, Ore. Tiffany, thanks a lot.
Couch: Thank you.
About the author
Kai Ryssdal is the host and senior editor of Marketplace, public radio’s program on business and the economy. Follow Kai on Twitter @kairyssdal.Pages
I think the issue here is regarding hedge funds and private capital. The practitioners of this trade make money by investing others money, not necessarily theirs, but get taxed as though it was their money that was invested (capital gains at 15%) not regular income (at 35%). Is that fair?
In a conversation last night, an interesting comment was made: Isn't the way the government taxes the wealthy differently from the rest of us discrimination? We have laws preventing discrimination over race, religion, sexual preference, etc. so why not wealth? And since the Supreme Court says corporations are people, why are they treated differently?
I agree with others about Market Place's lack of coverage on how our income tax system works, but the example of someone's grandmother getting taxed on her capital gains is an old bad joke. Most grandmothers in this country are lucky to have any savings after a few years of retirement, never mind a portfolio. Promoting the persona of an investor that takes on risk to grow our economy is a stretch. Most 'investors' use other peoples money, from our 401s, bank accounts, and pension funds. It is the small business man that takes on risk and produces wealth and jobs for the economy, not the money changers..
Last night your Ms Couch made reference to the $20 Million Mr Romney EARNED.
The US tax code makes a clear distinction between "earned" income, and"unearned" income most of which comprises Mr Romney's tax return. I hope you will clarify at least that point for we listeners.
James
Stamford
As everyone has pointed out capital gains is there because the income was already taxed once when it was received. That said I do not see why no one has thought to make capital gains follow some kind of marginal rate structure similar to what is used on ordinary income. This would allow protection of retirees who are earning $50,000 annually to pay a different rate than someone who is earning $1million in capital gains. You could put big steps in the rate but at least you would not end up with the absurdity of someone making $20M only paying 15%.
Why doesn’t AMT address this? This is one area where so many people are crushed every year.
I agree with the previous comments about Marketplace's incomplete reporting on Romney's tax rate. And they didn't mention that over half of Americans pay NO Federal income tax at all, even though they have an income. Why should they pay nothing for what the federal government provides, but somehow Romney is getting a break by only paying $3 million for the same services? That is not fair, and it is not fair reporting.
The whole idea that taxing the rich will solve our financial problems is crazy. I'm all for making things fair between citizens, but even if the income of the 1% were completely garnished for a year, it wouldn't make much of a dent in our debt crisis. Taxation needs to be balanced with spending.
If you thought Mitt's taxes were interesting, I wonder what Apple's tax amount is. 13 Billion profit is crazy. Perhaps the simplest tax reform low possible would be for everyone to publish their taxes like Mitt.
It is disturbing to me how this program claims to be educating the public on an obviously complicated tax system, and yet, as ezracorpse above mentions, you fail to provide listeners with the very basics required to understand Mr. Romney's federal income tax. Starting with basic definitions would be appropriate. Capital gains taxes are taxes on money earned when things such as stocks, bonds, property or other investments are sold. You may wonder how Mr. Romney acquired these assets so that they could be taxed at such a low rate. Or at least you should. Mr. Romney originally paid for these with money earned from a salary or wage, and taxed at a full rate of something around 35%.
Wait so that means... this money is taxed twice?? Not just once at an absurdly low rate as this story would lead you to believe???
Yes. First, Mr. Romney earns his money, and is taxed at a high rate. He invests this already taxed money, allows it to grow, and then when he decides he wants to take some money out of his investments, he has to pay an additional 15% to get it, for a total tax rate of around 50%. And, as the story mentioned, these are just federal taxes. Mr. Romney pays more to local and state governments, in addition to things such as social security and payroll taxes.
Marketplace, when attempting to "break down" this complicated tax code for us listeners, please show us some respect by covering the whole story. And maybe, just maybe, that will help us to focus on the important issues in these primary elections--the candidates and their platforms--as opposed to taking Mr. Gingrich's bait and turning Mr. Romney into a money-hungry capitalist villain.
Unfortunately, yourr analysis is incorrect. Romney probably did NOT earn the assets that he now collects capital gains, interest income and dividends from wages. Instead, he "earned" it from carried interest, a quirk in the tax laws that permit certain persons to pay a rate of 15% rather than a rate of 35% as wage earners do.
Romney's tax returns show that income is not treated equally. Taxes on earnings from investments are granted beneficial treatment that wage earnings are not. The irony of Romney's returns is that the persons that are treated most disparately by the carried interest benefit are wage earners that receive big salaries, such as physicians, lawyers or business leaders. After deductions, they pay a wage earners percentage of tax - approximatley 3x the rate paid by Romney.
Economists argue that the best tax system is one that is neutral with regard to how the earnings were generated. Americans also believe in a marginal tax rate - that is a progressive rate - because a dollar earned by a poor person is worth a lot more to him/her than to a rich man/woman. So, whatever the the percentage range of progressivity is agreed upon (it was about 90% during WWII), the rich get more so the rich should pay more.
Progressivity does not deter nor dampen investment or employment. Our highest tax rates coincide with the period in which income disparity was not as dramatic and we had higher employment.
Romney's income is not taxed at a high rate, but it should be.
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