Exploring Mitt Romney’s Taxes and Tax Plan
August 21, 2012, 6:00 am
By BRUCE BARTLETTBruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”
An examination of the two years of tax returns that the Republican presidential nominee Mitt Romney has made public sheds light on some fundamental concepts of taxation that illuminate his proposed tax cut. These include the meaning of “taxes” and “income.”
For most people, income is simple: it means wages or perhaps a pension or Social Security benefits. Income from capital – dividends, interest, rent and capital gains – seldom enters into the calculation. The vast bulk of such income is earned by the ultrawealthy, like Mr. Romney.
According to the Tax Policy Center, in 2011 those in the middle of income distribution got about 70 percent of their income from labor and only about 3 percent from capital. By contrast, those in the top 1 percent of income distribution got 30 percent of their income from labor and 35 percent from capital.
The disparity is even more pronounced when one looks at the distribution of aggregate capital income. The total came to $1.1 trillion last year. Of this, 86 percent was earned by those in the top 20 percent of households, ranked by income. But this figure is misleading, because within the top quintile, the vast bulk of capital income went only to those at the very top.
Those in the lower three-quarters of the top quintile – that is, those in the percentiles from 80 percent to 95 percent – received only 13 percent of aggregate capital income. Those in the top 1 percent of the income distribution received $634 billion, 57 percent of the total. And those in just the top 0.1 percent – the top 10 percent of the top 1 percent – received $425 billion of that, 38 percent of all capital income.
Among the reasons that this is important is that the tax code makes a sharp distinction between income from labor and income from capital. Wages are fully taxed at rates as high as 35 percent by the income tax, plus taxes for Social Security and Medicare. In contrast, realized capital gains and dividends on corporate stock are taxed at a maximum rate of 15 percent and do not bear any taxes for Social Security or Medicare.
This is the key reason that Mr. Romney paid a federal income tax rate of 13.9 percent in 2010 and 15.4 percent in 2011. By contrast, his running mate, Representative Paul D. Ryan of Wisconsin, paid a rate of 15.9 percent in 2010 and 20 percent in 2011, despite an income that was 10 percent of Mr. Romney’s in 2010 and 15 percent in 2011.
According to Mr. Romney’s 2011 return, he had no wage income at all; 100 percent came from capital. About 20 percent of Mr. Romney’s income came from interest, about 15 percent from dividends, 13 percent from rent and 51 percent from realized capital gains. We don’t know what his total capital gain was because unrealized gains are not taxable.
By contrast, 47 percent of Mr. Ryan’s income came from wages, 36 percent from rent, 10 percent from capital gains, 5 percent from dividends and 1 percent from interest.
Against the complaint that he pays taxes at a rate much lower than others with multimillion-dollar incomes, Mr. Romney points to that he makes large charitable contributions. As a Mormon, he is required to tithe and pay at least 10 percent of his income to the church. The Mormon Church is, of course, a tax-exempt institution.
Mormons define income for tithing purposes. An academic study found that while there was some variation in how they interpreted the term “income,” in general it consisted of cash receipts less savings. In Mr. Romney’s case, he appears to have defined income for tithing purposes as roughly meaning adjusted gross income from line 37 of his tax return. On an A.G.I. of $20.9 million, he gave $2.6 million to the church. He also made other charitable contributions for a total of $4 million in 2011.
Mr. Romney has said that his charitable contributions are akin to tax payments insofar as both finance social welfare. Of course, social welfare is only a small portion of federal spending that would get even smaller under Mr. Romney’s budget proposal.
Nor is it reasonable to assume that all of his charitable contributions financed private social welfare; much of the Mormon Church’s received contributions go into business investments, as Bloomberg Businessweek has reported.
The distribution of income is extremely relevant for Mr. Romney tax plan. He has said that he will close enough tax loopholes so that the wealthy will pay the same share of taxes they are paying now, even though he will cut their income tax rates by 20 percent. However, he has also said that the current low rates on dividends and capital gains, which expire at year’s end, will be made permanent.
Thus Mr. Romney would preserve exactly those provisions of the tax code most responsible for millionaires like himself paying tax rates considerably lower than those with a fraction of his income, like Mr. Ryan.
It is principally for this reason that the Tax Policy Center recently concluded that Mr. Romney’s numbers don’t add up. Either he will greatly increase the deficit or he will have to raise taxes on the middle class to maintain revenue neutrality. Even if every deduction, exclusion and credit for the wealthy was abolished, their taxes would still go down under Mr. Romney’s plan.
Democrats have said that the Romney tax plan would raise taxes on the middle class. While this is logically consistent with what Mr. Romney has said about his plan, I do not believe that is his intention or what will happen if he is elected president. Rather, I think he and his advisers simply made up a proposal that was everything to everybody without bothering to check for internal consistency.
For someone who has made his business acumen and expertise with finance a cornerstone of his presidential run, that Mr. Romney’s signature campaign proposal doesn’t add up may be the most telling fact voters need to know about him.http://economix.blogs.nytimes.com/2012/ ... -tax-plan/