Mitt Romney\’s tax rate

Help me out here. Isn\’t it so low because he gives money to charity, the US system allowing such donations to reduce your tax bill?

18 comments on “Mitt Romney\’s tax rate

  1. Up to a point. He reduces his tax bill somewhat by giving money to charity, most of it to the Church of the Latter Day Saints, aka Mormons.

    The main reason why his tax rate is so low is that much of his income is treated as capital gains, under the “carried interest” rule. So he pays Federal tax on it at 15% rather than 35%.

    I’d be interested to hear a coherent defence of the carried interest rule, which allows income paid in respect of fund performance to be a treated as a capital gain. Because it makes no sense to me.

  2. Private equity carried interest is treated as capital (gains) in both the US and UK, and tax rates are in line with that treatment. It’s 13% in the US. There was a huge lobbying effort over this issue very recently in the UK.

  3. Given Romney chooses his investments, but not his tax rate, surely he should be judged on the former rather than the latter?

  4. @ PaulB
    The following is not a defence.
    Carried Interest is taxed as capital gains because the guy gets a lump sum at the time the investment is sold and the investors in the fund receive a capital gain on the money they had invested.
    In my view this is remuneration to the manager but the lawyers have structured it so that it is treated as a capital gain.

  5. Capital gains and dividends, both of which are taxed at just 15%.

    I think his average tax rate was reported as 13.9%, so a few charity donations and other deductions as well, but mostly it’s just the lower rate.

    This is of course “tax compliance” (as Murphy might say), there simply being a lower rate for investment income.

    But I don’t think it’s anything to do with “carried interest”. He’s not been a hedgie for over 10 years; this is just his personal investments.

  6. PaulB (#6) – but since he hasn’t been working for Bain Capital since 1999 (unless Wikipedia is wrong, which is always possible), it would be difficult to argue that gains he receives now are really earned income.

    If the carried interest rule had not been in place, he’d have been taxed on the carried interest at some historic value when he earned it. But the increase in value over the subsequent 10 years looks like genuine capital gain.

  7. The charitable donations are deducted from taxable income, not tax. So 3 off 45, not really driving anything.

  8. Romney has a deal with Bain Capital under which he continues to receive a share of profits. This would seem to be income in recognition of the way his past contribution contributes to current profits; it’s certainly not a return on capital investment.

  9. That’s an argument to the effect that capital gains tax isn’t too low, as one might guess from the title. It doesn’t say a word about the carried interest rule.

  10. The majority of Romney’s income is from investments. This revenue stream is subject to corporation tax, taking the overall level of tax paid to over 50%. As has been noted, a comparison of apples and minute steak.

  11. PaulB (#10), thank you, that explains the continuing carried interest.

    But this is where taxing carried interests becomes complicated.

    He’s now got a capital asset (the interest in Bain); he obtained it initially as a result of his work, but now he’s got it, it’s just a capital asset generating investment income.

    If he sold his interest in Bain Capital (which he possibly can’t, but if he did) and reinvested the proceeds in other investments, we wouldn’t try to tax the return on those as earned income. So I don’t see why this should be any different.

    However what they arguably should have done is value the capital asset (the interest in Bain) when he received it, and tax him (at earned income rates) on that. That’s the “fair” way to do it, but that’s the point at which all the hedgies flee to Switzerland.

  12. The explanation is rather straightforward (as straightforward as American tax matters ever get). Investment income is double-taxed – and Romney’s “15%” represents only the second layer.

    Here is one source:

    h**p://taxprof.typepad.com/taxprof_blog/2012/01/mitt-romneys-true.html

    The WSJ article linked in this source is available by subscription only, but the the following is quoted at the link:

    “When double taxation of investment income is taken into account, Mr. Romney most likely underestimated his effective tax rate on the campaign trail. The former Bain Capital CEO and Massachusetts governor caused a brouhaha last week when he estimated the tax rate on his investment income at 15%. “How unfair!” pundits exclaimed, noting that the top marginal rate for wage income is more than 30%.”

    “The tax rate on investors is unfair, but for the opposite reason. Our tax code layers taxation of dividends and capital gains on top of a top corporate tax rate of 35%—which even President Obama acknowledges is one of the highest in the world.”

    “This is ironically the embodiment of the ‘corporate personhood’ legal doctrine otherwise so decried by the left. The law taxes corporations as if they were separate beings from the shareholders who own them and then levies a separate tax on shareholder payouts and gains. This double taxation brings the effective tax rate on investment income to as much as 44.75%.”

  13. Leaving aside the debate about corporate taxation, Bain Capital Partners is presumably a partnership, so it doesn’t pay corporation tax. And other parts of the Bain Capital group which are not partnerships are incorporated offshore.

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