Thursday, January 26, 2012

Romney's 15% Problem: He Pays the Same Tax Rate as a Family Making $50,000

Mitt Romney's private equity problem is taking a backseat today to Mitt Romney's tax problem. The GOP frontrunner acknowledged that his effective tax rate is around 15%, thanks to the tax code's preferential treatment of income from investments and private equity firms.

As Pat Garofalo explained for The Atlantic, a considerable portion of Romney's income comes from a retirement deal with Bain Capital that continues to pay him a small share of the firm's profits. The wonky term for this cool stream of money is "carried interest" -- the share of investor gains "carried" by the private equity or hedge fund manager.*

You might expect that Mitt's millions would be treated as earned income, because it represents gains from a service rendered by a private equity manager. Normally, that sort of money would be taxed at the top 35% marginal rate. Instead, the tax code treats Romney's retirement payout as carried interest -- investment income from a private equity firm shared among its managers. As a result, Romney pays Uncle Sam only 15% of his Bain Capital income.

In 2009, 15% was the average effective tax rate for households making between $75,000 and $100,000, in the middle quintile of U.S. families. That means Mitt Romney, a mega-millionaire, pays the tax rate as if his were a firmly middle class family, which would seem to pose a considerable political problem to a candidate fighting for middle class votes. To be clear, I don't think it's a moral problem. It's not like it's his fault, or anything. It's just the natural outcome of a tax system designed to give special treatment to investors -- and private equity managers, in particular.

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