(Bloomberg News) Republican presidential candidate Mitt Romney's 2010 tax returns and the 13.9 percent rate he paid highlight how wealthy investors can use the preferential treatment of income classified as capital gains and dividends to minimize payments to the U.S. government.
The returns provide a glimpse into the financial life of Romney, whose campaign estimates his fortune at between $190 million and $250 million. Romney and his wife, Ann, receive money from blind trusts that invest in hedge funds and receive profits that flow from the private-equity investments Romney made during his career at Bain Capital LLC. The couple donated about 16 percent of their income to charity.
"The most affluent Americans in recent years have pulled away from the rest of us, and the reason is at least in part that they are able to compound their wealth at very, very low tax rates," said Edward Kleinbard, a law professor at the University of Southern California. "Romney's tax return, with its heavy reliance on income taxed at low capital gains rates, demonstrates that."
The Romneys earned $21.6 million in 2010 and paid $3 million in income taxes. More than half of the former Massachusetts governor's earnings were considered 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 released the returns yesterday.
"Oh, I'm sure people will talk about it," Romney, 64, said during a debate in Tampa, Florida, on Jan. 23.
Near the Top
Romney's income puts him near the 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 had the refund applied to their 2011 taxes.
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.
Rekindling Debate
The discussion of Romney's returns has reignited the political debate over the tax treatment of investments and particularly carried interest, or the profit stake that private- equity managers receive from successful investments even if they don't invest their own money. Carried interest is taxed at capital gains rates, and President Barack Obama and many Democrats want to reverse that policy, calling it unfair.