Mitt Romney's Tax Returns: Here's What Really Matters

His taxes don't show that he's done anything wrong. They show that the tax code is wrong.

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Here's what we know about Mitt Romney's money in 2010 and 2011, based on 500 pages of tax returns he released late last night.* He made $43 million in income over those two years. Almost all that money came from investments such as capital gains on investments and compensation from Bain Capital. None of it came from wages.

Here's what we know about Mitt Romney's taxes. Romney has donated more money to charity -- $7 million, including $4.1 million to the the Church of Jesus Christ of Latter-day Saints -- than he owed to the IRS over the last two years. In 2010, Romney's effective tax rate was 13.9%. In 2011, his estimated effective tax rate will be 15.4%. Romney's average effective tax rate is considerably lower than most people in the top 10 percent -- or even the top 0.1% -- because his income comes almost entirely from capital gains, dividends and interest, which are taxed at a lower rate than earned income from wages. Romney's effective tax rate is also lower than that of many middle-class families, who owe payroll taxes, unlike the former Massachusetts governor.

And here's why Mitt's taxes matter. Politically, they matter, quite simply because the people who matter -- those would be the voters -- think they matter. That sounds circuitous. But it's true. Since Romney's wealth and tax rate became an issue, the frontrunner has lost a 10-point lead in South Carolina, watched a 20-point lead reverse itself in Florida, and seen a 19-point lead collapse nationwide. It's impossible to say that Romney's wealth and IRS filings don't matter to voters. They obviously matter.

But substantively, Mitt Romney's wealth doesn't really matter. It's the tax code that matters.

"Governor Romney has paid 100% of what he owes," a Romney spokesperson said on a conference call this morning. I believe him. Mitt Romney is a remarkably successful businessman, and his wealthy reflects a legally gained fortune which is being taxed according to the law.

But the law doesn't make any sense! Consider that over the last two years, Romney has earned $13 million from profits shared by Bain Capital. You might have heard this money referred to as "carried interest." It is earned income. It represents the work of Bain Capital managers. But Romney's share is taxed at 15%, as capital gains, as though Romney's capital were stake at Bain, which it isn't. This freak tax windfall saves Romney, or deprives Treasury, of more than $2 million. 

It's not that Romney tax return proves he's done something wrong. It's that his tax returns prove that the tax code is wrong. Households worth $200 million earning $20 million in investment income a year shouldn't be paying a lower tax rate than some middle class families, especially at a time when we're thinking about cutting spending that disproportionately benefits the lower and lower-middle class.

Romney's tax return could serve as an inflection point in the tax discussion. You might say it already has. Consider last night's TV debate, when Mitt Romney told Newt Gingrich that the former speaker's tax plan goes too far, since it would lower Romney's own tax rate to zero. This was a remarkable moment. The GOP frontrunner, who's won the endorsement of almost every serious conservative mainstay, stood athwart tax-cut-mania conservatism and said, "Stop." Or at least, he said: "Too far."

In an election that will be about inequality and taxes, Mitt Romney tax returns are a glowing artifact of inequality in the tax code. And by proposing to make capital gains entirely tax-free, Gingrich has proposed a tax plan that would make our law even more unequal. That's why, even without the polls, you can fairly say that Mitt Romney's tax returns matter.

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*We will be updating this post as we correspond over the course of the day with our friends at the nonpartisan Tax Policy Center, who are currently reviewing the documents.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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