When Barack Obama talks about taxes these days, he likes to talk about Omaha billionaire Warren Buffett’s secretary. “Middle-class families shouldn’t pay higher taxes than millionaires and billionaires,” Obama announced last month in the Rose Garden. “Warren Buffett’s secretary shouldn’t pay a higher tax rate than Warren Buffett.” But if Mitt Romney is able to clinch the Republican nomination for President next spring, Obama will have a better example to talk about.
That’s because Romney, a wealthy man whose income mostly comes from long-term investments, is exactly the sort of “millionaire and billionaire” that Obama likes to hold up for scrutiny, since the source of Romney’s income allows him to pay a lower percentage of his money to the federal government each year than many middle-class wage earners.
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Just how much Romney pays in taxes is, for the moment, a private matter. But his income is public knowledge. In August, Romney disclosed that in 2010 he and his wife made between $1.1 million and $2.8 million in royalties, salary, speaking fees and interest, most of which was likely taxed at a marginal rate of 35%, after accounting for deductions. The Romneys made an additional $5.5 million to $37.3 million from dividends and capital gains, which is generally taxed at a much lower rate of 15%.
Calculating the Romneys’ exact tax burden from public records is not possible because a number of factors, like the amount of money that Romney deducted from his taxes and the length of time that he owned investments, are unknown. But ballpark estimates are possible. Assuming that Romney declared roughly the same number of deductions as others in his income level and that his dividend and capital gains income qualified for the 15% bracket, Romney would have paid roughly 14% of his gross income in taxes to the federal government in 2010 according to Bob McIntyre, who crafts tax policy at the left-leaning Citizens for Tax Justice.
People who earn as much money as Romney typically make most of it in capital gains and often deduct more than they earn in royalties, salary and interest. In other words, they never pay the 35% rate that their income would be subject to if they just got a paycheck like most Americans.
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And this is exactly the dynamic that Obama and Buffett have been talking about in recent weeks: For a select group of wealthy investors, the regular income tax structure simply does not apply. (Buffett claims to pay just 17% of his net income in taxes.) It pays to be an investor in a way that it does not pay to be a high paid actor or professional sports star. If Romney made the same amount of income in 2010 as he declared, but it all came as a direct salary, McIntyre calculates that he would have paid something closer to 30% of his net income in taxes. “There is no justification for it,” Obama said in the Rose Garden. “It is wrong that in the United States of America, a teacher or a nurse or a construction worker who earns $50,000 should pay higher tax rates than somebody pulling in $50 million.”
On the campaign trail, Romney has defended the 15% tax rate on capital gains, which is set to expire in the coming years. “The President’s party want to take from some and give to others,” Romney said in a recent debate. “That isn’t the way to lift America.” And while other Republicans running for President have proposed lowering or eliminating the capital gains tax for wealthy individuals, Romney has tried to cast himself as a defender of the middle class. His economic plan would maintain the 15% capital gains rate for those making more than $200,000 in total income, and eliminate any capital gains tax on those making less than $200,000.
Should Romney win the Republican nomination, he will face substantial pressure to release his own tax returns. Usually such disclosures are little more than formality, but in Romney’s case, it would land him in the middle of one of the biggest policy debates of this election season. Democrats long ago signaled their intent to cast Romney as a wealthy financier who is out of touch with the concerns of middle-class voters. “What Mitt Romney is going to have to explain to the American people is not just what he pays personally in taxes, but why he thinks the wealthiest Americans shouldn’t have to pay a dime more,” says Brad Woodhouse, a spokesman for the Democratic National Committee.
Gail Gitcho, a spokeswoman for the Romney campaign, declined to say whether Romney intends to release his tax returns. “That is something they will decide should he win the nomination,” she said.
So far Obama’s focus on wealthy people who pay less in taxes because they make their money from investments has been mostly rhetorical. He says that these people should pay just as much as a middle-class wage earner, but he has not put forward any hard numbers. Some middle class taxpayers also pay as little as 15% in net taxes, after taking deductions for their family, home mortgage interest and other expenses.
However, any tax reform plan put forward by Obama would likely have a significant impact on Romney’s returns. And perhaps more importantly, if Romney wins the nomination, Obama will have a great line to use in debates and on the stump. He wouldn’t just be running against Romney, he’d be running against the large tax advantage that a millionaire investor’s income provides.