Mitt Romney’s statements yesterday about his earnings and taxes went over like a platinum balloon.
ABC News (“Romney Reveals His Tax Rate Is ‘Probably Closer to 15 Percent’“):
Mitt Romney revealed for the first time today that his effective tax rate is “closer to 15 percent,” suggesting that he pays less in taxes than many middle income Americans despite being worth an estimated $250 million.
“What’s the effective rate I’ve been paying? It’s probably closer to the 15 percent rate than anything,” Romney said during a press conference after an early morning rally. “Because my last 10 years, I’ve…my income comes overwhelmingly from some investments made in the past, whether ordinary income or earned annually. I got a little bit of income from my book, but I gave that all away. And then I get speakers fees from time to time, but not very much.”
This will, quite reasonably, reignite the debate over the so-called “Buffet Rule” (the idea that the very highest earners ought to pay at least as high a percentage of taxes as their secretaries) and the differential treatment between regular income (“earned income,” in IRS parlance) and money earned from stocks and other investments (“unearned income”).
When the topic first came up some months back, I argued that it makes sense to treat true investment income differently than salary income, since the former carries risk and often accrues over years of deferred gratification. The caveat, though, is that we should differentiate investments from “investments.” That is, CEO pay disguised as stock options and held for short periods are really just salary. And the “carried interest rule,” which applies to those like Buffett who make their money as fund managers and pretends that the money they invest for others is their own investment, is pure rent seeking and therefore a loophole we ought to close.
I haven’t spent enough time researching Romney’s residual income from Bain Capitol to have any strong view on how it should be taxed. My instant reaction, though, is that it’s probably closer to “investment income” than investment income.
I will say, however, that the way the “15 percent” figure has been treated in the press is largely inaccurate. ABC News is at least technically correct when it allows that “he pays less in taxes than many middle income Americans” (emphasis mine) rather than the more widespread declaration that this is less than the average middle income earner pays. It just ain’t true.
I don’t have more recent figures but this chart, dated 11 April 2011, by the Tax Policy Center (a coalition of the liberal Urban Institute and center-left Brookings Institution) shows the “Historical Effective Federal Tax Rates for All Households” over the years:
As you can see, those in the middle quintile pay an effective federal tax rate of 14.3 percent in 2007, the most recent year available. Those in the lower quintiles pay much less. More importantly, those in the top quintile pay much more–and the top 1 percent more still.
And those figures include FICA. The effective individual income tax rate is far, far smaller for all concerned:
As you can see, the bottom two quintiles actually pay a negative income tax–that is, their deductions exceed their tax liability and they get money back from the government through the Earned Income Tax Credit and other mechanisms–and even the third and fourth quintiles pay less in federal income tax than they do in state and local sales taxes. Even the upper quintile actually pays less than Romney’s 15 percent.
Romney is also catching flak for this line:
”I got a little bit of income from my book, but I gave that all away. And then I get speakers fees from time to time, but not very much.”
It turns out that the “not very much” is more than most of us make from all income sources combined: $374,000.
Now, that’s easily explainable. First, $374,000 is indeed “not very much” in terms of Romney’s overall income. Second, Romney was likely brought up to downplay how much money he had so as not to rub other people’s noses in it.
While understandable, though, it was a terrible gaffe from an ordinarily quite disciplined campaigner on perhaps his core vulnerability–especially in the current political and economic climate. I’m shocked that Romney wasn’t better coached on the rollout of his income tax statement.
Is this gaffe going to do permanent damage? Probably not. I’d argue it’s far less damaging Barack Obama’s April 2008 declaration that working class Americans “ get bitter, they cling to guns or religion or anti-pathy to people who aren’t like them, or anti-immigrant sentiment or anti-trade sentiment as a way to explain their frustrations.” Obama obviously survived that one, going on to win the nomination and coast to the presidency.
But, damn, it was a dumb thing to say.
