Meet the new Romney tax return, nearly the same as the old Romney tax return.
It was quite the disclosure day for the Romney campaign. Aside from releasing the broad outlines of how much he paid between 1990 and 2009, the Romney campaign also sent out his 2011 tax return. It was 379 pages of disclosures that mostly disclosed what we already knew from his 2010 tax return: Romney makes a lot of money, he gets a lot of money from offshore investment accounts, and he gives away a lot of money. Oh, and he pays a very low effective federal tax rate -- lower than what many middle-class households pay. Here's what you need to know.
(1) Romney paid a 14.1 percent effective federal tax rate in 2011 -- and it could have been lower. Romney had an adjusted gross income of $13,696,951 in 2011 and paid $1.95 million in taxes, for a cool 14.1 percent. Romney manages such a low rate because most of his income comes from capital gains -- which is taxed at 15 percent, instead of the 35 percent Romney would otherwise pay. But Romney could have paid even less this year. He didn't take the full deduction he could have on his charitable giving. After all, he's running for office, for Pete's sake -- and he pledged to have never paid less than a 13 percent rate. Noam Scheiber of The New Republic calculates that Romney could have saved $262,500 -- for a 12.2 percent effective rate -- if he had taken the full deduction he was entitled to.
(2) Romney's income mostly comes from investment funds located offshore. The tax returns of the rich are different from yours and mine. They mostly detail offshore investment holdings. As Zach Carter of the Huffington Post points out, 266 of the 379 pages of Romney's 2011 taxes are about foreign corporations and partnerships. Read that again. These funds are not set up overseas so that people like Mitt Romney can avoid taxes. These funds are set up overseas so that institutions like university endowments can avoid taxes.
Tax-exempt entities face a special tax called the unrelated business income tax (UBIT). When they own a part of a business, they have to pay UBIT on whatever income they get from it -- otherwise these businesses would have the competitive advantage of not having to pay taxes. That actually happened when some alums donated the Mueller Macaroni Company to NYU Law School back in 1948. What does this have to do with investment funds? Well, most funds -- including for private equity shops like Bain Capital -- are set up as distinct corporate entities. Big investors like university endowments would face the 35 percent UBIT on top of 15 percent capital gains taxes if these funds were set up in the United States. So they don't. They set them up in the Cayman Islands instead.
(3) Romney still benefits from the so-called carried interest loophole. Imagine if you could have your wages taxed as capital gains instead of as wages. That would be a pretty sweet deal if your marginal tax rate is greater than the 15 percent capital gains tax rate. That sweet deal is what private equity managers, hedge funders and venture capitalists call "carried interest". These financiers get to classify the fees they earn on profits as capital gains, even when it's not their capital at risk. Among the people who thinks this makes no sense are Romney economic adviser Greg Mankiw. Romney still gets carried interest, because he still gets a share of Bain Capital's profits as a part of his retirement package. What's not clear is just how much carried interest he gets. Romney estimated it would be $5.5 million for 2011 -- but that was back when he thought he would make $20.9 million for the year, rather than the $13.7 million he actually did. In either case, it saved him a nice pile of cash.
(4) Romney donated a lot to charity. Romney gave away nearly $4 million of his $13.7 million in income to charity in 2011. But, as previously mentioned, he only deducted $2.25 million of this giving.
The biggest revelation here is that it's good to be rich. But we already knew that from Romney's 2010 tax return. As my colleague Derek Thompson points out, Romney benefits from the preferential taxation of capital gains, from the crazy loophole that lets him count more income as capital gains, and from the best accountant money can buy. There's nothing scandalous about this -- other than the system that makes it possible. Now, there are good arguments about efficiency for keeping capital gains taxes low, as Matt Yglesias of Slate points out. But there are also good arguments about equity for not letting the super-rich pay less in taxes than the middle class.
It's almost as if we should have an election about this.