So Mitt Romney is releasing his 2011 tax returns. The top line is that the Romneys’ effective tax rate last year was 14.1 percent.
The Romney campaign also released new info on how much he paid from the years 1990-2009, claiming: “Over the entire 20-year period, the average annual effective federal tax rate was 20.20%.”
That 20 percent figure sounds a lot better than 13 or 14 percent, right? Well, here’s the problem: It all turns on how that 20 percent figure was calculated.
Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center, tells me there are two ways to calculate it. First, the campaign could simply have averaged the rates against each other — treating the rates themselves as a collection of individual numbers — to calculate the overall average rate.
The second way to calculate it would be to add up all the income Romney earned over the 20 years, add up the total amount he paid in taxes during that period, and calculate the overall average rate paid that way.
The Romney campaign confirmed to me just now that the 20 percent figure was calculated the former way — it represents an average of the rates themselves.
Williams tells me that this is a far less meaningful way to calculate the overall rate than the second way, which actually calculates the real tax rate Romney paid over the period.
Here’s why: The first way obscures the fact that income may have fluctuated quite markedly from year to year. If Romney paid his lowest rates in a number of the higher income years, the overall 20 percent figure would overstate the rate he actually paid over the whole period. Williams provided the following purely hypothetical example:
“Let’s say you have 10 years in which you paid 13 percent in taxes, and 10 years in which you paid 27 percent,” Williams told me. “If you average those rates, you’ll get an overall rate of 20 percent. But if the 13 percent years were high income years, and the 27 percent years were low income years, then his total taxes paid as a share of total income over the 20 years would be less, perhaps significantly less, than 20 percent.”
Yet in that scenario, the Romney campaign would be claiming, by its chosen metric, to have paid 20 percent.
How realistic is it that Romney could have had far higher income some years than others?
“You can be a person like Romney and have a highly fluctuating income year to year,” Williams said. “Some years Romney’s income could be much lower than in other years. When you average just the rates, you can distort the rate you’ve paid relative to your income over the whole period.”
Williams concluded: “The only way we can know for sure what rate he actually paid is to see what his tax payment and his income was for each of the 20 years.”