Tuesday, January 24, 2012

Romney's True Tax Rate

Much has been of the release of Mitt Romney's tax returns, and most of it has been misleading at best. The general summary has been that his effective tax rate has been 13.9% based on $3m in taxes and $21.7m in income for 2010. This fits with the argument that he pays a lower rate than his secretary as Warren Buffett likes to claim. However, both men know that that is not the true story. Most of his income (12.5m) was from capital gains which means that it was taxed twice -- once at the corporate level (which is borne by shareholders) and once at the personal level. Not enough information is given to figure the exact amount of pretax income and taxes paid, but let's assume that he made 17.5m before corporate taxes and then paid 5m to leave him with personal income of 12.5m. This would mean that he paid 8m in taxes on 26.7m in income resulting in an effective tax rate of 30%. If you deduct the 3m in charitable contributions he made from his income, then the effective tax rate is 8/23.7 = 33.76% which is much closer to his true tax rate.
If left in charge I would change it to where investment income and carried interest (which resulted in another 7.5m of his income) were taxed as ordinary income. Of course I would also eliminate the corporate tax rate (I'd also eliminate the charitable contribution and mortgage interest deductions). These changes would cancel each other out and wouldn't have too much effect on tax revenue, but at least they would provide an honest representation of the amount of taxes paid by individuals.