Republican presidential candidate Mitt Romney earned $21.6 million in 2010 and paid 13.9 percent of that amount in income taxes, using the preferential rate on investment income and charitable deductions to pay a smaller share of his earnings than top wage earners typically do.
The former private-equity executive and Massachusetts governor earned more than half of his income from capital gains and dividends, which are taxed at a top rate of 15 percent, rather than the 35 percent top rate for ordinary income. His campaign publicly released the returns today.
“Oh, I'm sure people will talk about it,” Romney said during a debate in Tampa, Florida, last night. “You'll see my income, how much taxes I've paid, how much I've paid to charity. You'll see how complicated taxes can be.”
Romney's income puts him near the very top of U.S. taxpayers. In 2008, according to the Internal Revenue Service, the median adjusted gross income was $33,048, which Romney earned in less than a day. Reaching the top 1 percent of taxpayers required $380,354 in adjusted gross income, about Romney's earnings in a week.
The Romneys received a $1.6 million refund after filing their 2010 return because they overpaid taxes during the year. They pay estimated taxes and at the end of the year, the tax return reconciles their payments. They had the refund applied to their 2011 taxes.
Estimate for 2011
The campaign also released an estimated tax return for 2011 showing that Romney had an effective tax rate of 15.4 percent on $20.9 million in adjusted gross income. That return hasn't been filed with the IRS.
The discussion of Romney's tax returns has reignited the political debate over the tax treatment of investments and particularly carried interest. That is the profits stake that private-equity managers receive from successful investments even if they don't invest their own money. It is taxed at capital gains rates, and President Barack Obama and many Democrats want to reverse that policy, calling it unfair.
Romney's 2010 income included $7.4 million in carried interest, said Ben Ginsberg, national counsel for the campaign. Romney, a former executive at Bain Capital LLC, received $5.5 million in carried interest in 2011.
“Governor Romney has paid 100 percent of what he owes,” Ginsberg said.
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Ginsberg added that “much of the income” subject to the preferential rate on investments has already been taxed at rates of up to 35 percent in the corporations in which they were earned.
Billionaire investor Warren Buffett, who is calling for raising taxes on high-income Americans, said he blames Congress, not Romney, for the governor's tax rate.
“It's the wrong policy to have,” Buffett told Bloomberg Television's Betty Liu in an interview yesterday. “He's not going to pay more than the law requires, and I don't fault him for that in the least. But I do fault a law that allows him and me earning enormous sums to pay overall federal taxes at a rate that's about half what the average person in my office pays.”
In 2008, according to IRS statistics, fewer than 15 percent of taxpayers earning more than $200,000 had effective tax rates of less than 15 percent.
Romney, who lost the South Carolina primary Jan. 21, is competing in the Jan. 31 contest in Florida against his main rival, former House Speaker Newt Gingrich.
Gingrich's Plan
Ginsberg said Romney would fare better financially under Gingrich's tax plan than under his own. Gingrich would end all taxation of capital gains; Romney wouldn't let high-income taxpayers receive that break.
The 203-page return of Romney and his wife, Ann, along with returns from trusts and a foundation, provide a glimpse into the candidate's financial life. The net worth of the 64-year-old Romney is between $190 million and $250 million, according to an estimate from his campaign.
In 2010, the Romneys had more than $4.5 million in itemized deductions, including almost $3 million in charitable contributions. The couple donated $1.5 million in 2010 to the Church of Jesus Christ of Latter-Day Saints, which also received donations from the family's foundation. They contributed $2.6 million to the Mormon church in 2011, according to the estimated return.
Anthony Nitti, a tax partner at WithumSmith & Brown in Aspen, Colorado, said Romney's return is a “pretty extreme example” of someone receiving income at preferential tax rates on investments.
‘High Net Worth'
“For a high net-worth individual, there's nothing here that surprises me,” said Nitti, who reviewed the return for Bloomberg News.
The Romneys paid the alternative minimum tax, which is designed to prevent people from avoiding taxes legally. That parallel tax system doesn't eliminate the preference for investment income.
Nitti, who works with high-income clients, said the Romneys' trusts have investments in such places as the Cayman Islands. Even if the Romneys didn't make those investment decisions, he said, “there's some sophisticated tax planning going on.”
The 2010 return shows that the Romneys' blind trusts have invested in an array of assets based around the world, including the Caymans. The Romneys had a bank account in Switzerland, the return shows. The account has since been closed, said Brad Malt, a partner at Ropes & Gray LLP in Boston who operates the family's blind trusts.
‘Fully Disclosed'
“I thought that was prudent as a matter of diversification for trusts of this size,” he said. “I would like to emphasize that this bank account, in contrast to some that we've read about that have been the subject of criminal activity, is a fully legal, fully disclosed, fully reported bank account.”
Malt, who began working as the Romneys' trustee in 2003, said during that time he was unaware of any IRS audit of the couple's tax returns.
Romney's income probably didn't place him among the top 400 taxpayers. For the past several years, reaching that list required an adjusted gross income of more than $100 million.
In 2008, John McCain's presidential campaign released the senator's tax returns for the previous two years, 2007 and 2006, said Douglas Holtz-Eakin, who served as policy director for the Arizona Republican's campaign.
Those tax documents, released on April 18, 2008, showed that McCain earned $405,409 in 2007 and paid $118,660 in federal taxes. He gave $105,467 to charity, the records show.
McCain's campaign didn't release tax returns for his wife, Cindy, who is chairman of the Phoenix-based Hensley & Co., one of the largest beer distributors in the U.S.
--Bloomberg News--
