Mitt Romney Paid 30%, Not 13% In Federal Income Taxes

Charles Kadlec, Contributor
8/20/2012 @ 5:40PM

Forbes - The presumptive Republican nominee for President of the United States and wealthy businessman Mitt Romney at a press conference last Thursday said: “Over the past 10 years, I never paid less than 13%” in federal taxes.

No doubt Romney had considered carefully how to handle the tax issue before deciding to just put the 13% number out there and then move on: “I just have to say, given the challenges that America faces — 23 million people out of work, Iran about to become nuclear, one out of six Americans in poverty — the fascination with taxes I paid I find to be very small-minded.”

Really? This statement ignores rather than confronts President Barack Obama’s narrative that the big issue before the American people in this election is fairness and social justice. And the idea that someone who makes $22 million in a single year pays only 13% in federal income taxes will be used to feed the envy and resentment the President hopes to ride to re-election.

I can only wish that Romney had engaged this issue by adding the following sound bite: “Properly calculated, my tax rate was about 30%.”

Such a statement may have led to howls of protest from his opponents and the liberal press, with accusations that Romney was obfuscating how he was able to lower his tax rate.

So what. At least this approach would have given Romney the opportunity to engage the debate over fairness and social justice on his own terms. Explaining a tax system that on its face seems unfair would have treated the American people with respect and been consistent with Romney’s identity as a serious man who will be honest and direct with the voting public.

There are two reasons that the Romneys’ tax bill is below 15%. According to their 2010 tax return (the latest available), Mr. and Mrs. Romney reduced their taxable income by the $3 million they gave to charities.

The second and most important reason is the majority of the Romneys’ income is taxed twice – first at the corporate level, and a second time when they report it on their personal income tax return.

Taxable interest income accounted for $3.3 million of their $21.7 million in total income. Since companies are able to reduce their income dollar for dollar with the interest they pay out, interest income is not taxed at the corporate level, but only once as personal income. In the case of the Romneys, it was taxed at 35%, the top marginal personal income tax rate.

The Romneys also reported $4.9 million in ordinary dividends, of which $3.3 million qualified for the 15% tax rate. Unlike interest payments, corporations may not deduct dividends from their income. Dividend income therefore is taxed twice, first at the corporate level, and then again when it is reported on an individual’s personal income tax return.

A precise calculation of this double tax is impossible to make because the tax rates paid by different corporations vary widely – from 0% by GE and General Motors to the top corporate tax rate of 35%. A rigorous economic analysis would use the top marginal tax rate because that is the rate that affects economic decisions. However, for the purpose of this analysis, a reasonable estimate would use the average U.S. corporate tax rate which, over longer periods of time, has been 25%.

Based on a 25% tax rate, for every $133 a corporation earned, it had to first pay $33 in federal income taxes before it could distribute $100 in dividends. Next, on every $100 of dividend income received, the Romneys paid an additional $15 in taxes. The combined tax of $48 totals out to a 36% rate on dividend income ($48/$133), which approximates the top personal income rate imposed on interest income.

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