Why is Mitt Romney’s tax rate so low?

at 11:31 AM ET, 01/17/2012

For months now, Mitt Romney has been refusing to release his tax returns. But he’s not said why. “Is there some secret?” MSNBC’s Andrea Mitchell asked him in December. “People know you’re wealthy.” But Romney was unmoved. “There’s nothing to hide,” he said, but no, he wasn’t planning on releasing the returns.
Republican presidential candidate Mitt Romney. (SOURCE: AP )

Some observers speculated that Romney had a “Buffett rule” problem. The Buffett rule is named for Warren Buffett, who frequently complains that the low marginal tax rate on investment income —15 percent, as compared to a top rate of 35 percent for wage income— leaves him paying a lower rate than his secretary. It was possible that Romney, who also derives much of his income from investments, might also be paying a low rate. And that could be a political problem for Romney. It’s one thing, after all, to be wealthy. It’s another to be wealthy and paying a lower tax rate than people who aren’t wealthy.

Today, at a campaign event in Florence, S.C., Romney confirmed it: He admitted that his effective tax rate is actually 15 percent, aside from some income from book royalties, according to HuffPost’s Sam Stein.

But that might not be the end of the issue for Romney. It’s likely he also benefited from related tax privileges during his time at Bain. While the lower rate on capital gains and dividend income is supposed to benefit investors, private-equity executives and hedge-fund managers who get paid by taking a share of their firm’s profits rather than a normal salary are also able to classify their income as a capital gain rather than a wage, and so they, too, pay a 15 percent tax rate — even when that money is, effectively, their salary.

Ultimately, the private-equity tax loophole could become far more controversial than whether private-equity deals destroy or create jobs. Today, even the Wall Street Journal came out against the loophole, arguing that capital gains should benefit those actually receiving a return on an investment rather than labor. “It is difficult to defend the fact that private-equity and hedge-fund executives pay no more than 15% on their share of their partnership’s profits because it is considered a capital gain,” writes Francesco Guerrera, editor of the Journal’s Money & Investing section. “If it looks like income and smells like income, it should be taxed like income—at much higher rates.”

Interestingly, all this may explain why Romney has moved away from his position in 2007, when he advocated for eliminating the capital gains tax entirely during a Florida GOP dinner. Romney says that he wants to eliminate the tax just for families earning less than $200,000 a year--presumably preserving the 15 percent tax on wealthy earners like himself. This places him to the left of every other major GOP candidate, who’s either campaigned on eliminating the tax or lowering the rate across the board. 

By contrast, President Obama has long campaigned for closing the carried-interest loophole entirely. It was a part of his 2011 platform and House Democrats passed a bill closing it in 2010, which would raise about $25 billion over the next 10 years. Obama also wants to raise the capital gains tax itself.

 
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