Romney Pays Low Tax, But It's Perfectly Legal
by AccountingWEB on
By Ken Berry
Appropriately enough, "Mitt" Romney (real first name of "Willard") has been catching a lot of flak lately for the relatively small amount of tax he pays, despite the millions in assets that he owns. But the front-runner for the Republican nomination for president is only doing what the filthy rich usually do: paying the least amount of income tax they are legally obligated to pay.
To counteract a growing firestorm, Romney released his federal income tax returns for 2010 and 2011 last week. The returns showed that the former Massachusetts governor paid tax for those two years at an average rate of 14.5 percent on an annual income of more than $21 million. This effective tax rate is comparable to the same tax rate faced by most middle-income families in the country, even though Romney earned 420 times the amount of the typical household!
How does Romney qualify for such a low tax rate? The bulk of his income is derived from his investments. Under our nation's progressive tax system, individuals who are high-wage earners are normally taxed at a higher rate than those who earn less, but the tax rate for capital gains is traditionally lower than the highest ordinary income tax rate.
Currently, ordinary income is taxed at rates reaching up to 35 percent, while the maximum tax rate on long-term capital gains is only 15 percent. This maximum 15-percent tax rate – which was the centerpiece of the "Bush tax cuts" and has been extended throughout the last decade – is scheduled to increase to 20 percent after 2012, barring any new legislation from Congress.
The partisan debate over income tax rates is certain to heat up as the presidential election draws near. Adding fuel to the fire, mogul Warren Buffett recently proposed that millionaires should pay tax at a higher rate, a position that has been supported by the Obama administration.
Turning the media spotlight on a presidential candidate's finances is a tried-and-true political maneuver. And Romney's vast wealth makes him an easy target. If elected, it's estimated that he would be one if the richest presidents in history – even accounting for inflation – along with the likes of George Washington, Thomas Jefferson, Herbert Hoover, and John F. Kennedy. Based on Romney's broad characterizations, he owns assets valued at somewhere between $190 million and $250 million. In comparison, President Obama, who is certainly no pauper, is estimated to own assets valued between $2.2 million and $7.5 million.
Yet Romney is merely taking advantage of the tax law provisions that are currently in place. Thus far, no one has accused him of any specific tax wrongdoing, other than pointing out the significant benefits he has enjoyed.
Undoubtedly, your clients would hope and expect to capitalize on the same tax breaks, albeit probably on a smaller scale, when the opportunities present themselves. So maybe Romney just has a good CPA!
How will the tax controversy affect Romney's chances for winning the nomination? Judging from his comeback victory in the Florida primary January 31, he appears to have weathered the storm. But you can be certain that talk of taxes on the wealthy and tax reform will resurface in the coming weeks.