TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, January 25, 2012

Mitt Romney's True Tax Rate: 44.75%

Wall Street Journal op-ed, Romney and the Burden of Double Taxation, by John Berlau & Trey Kovacs (both of the Center for Investors and Entrepreneurs, Competitive Enterprise Institute):

When double taxation of investment income is taken into account, Mr. Romney most likely underestimated his effective tax rate on the campaign trail. The former Bain Capital CEO and Massachusetts governor caused a brouhaha last week when he estimated the tax rate on his investment income at 15%. "How unfair!" pundits exclaimed, noting that the top marginal rate for wage income is more than 30%.

The tax rate on investors is unfair, but for the opposite reason. Our tax code layers taxation of dividends and capital gains on top of a top corporate tax rate of 35%—which even President Obama acknowledges is one of the highest in the world.

This is ironically the embodiment of the "corporate personhood" legal doctrine otherwise so decried by the left. The law taxes corporations as if they were separate beings from the shareholders who own them and then levies a separate tax on shareholder payouts and gains. This double taxation brings the effective tax rate on investment income to as much as 44.75%.

In other words, after the combined top tax rates hit $100 of corporate income, $55.25 remains for the investor. And this figure doesn't even include various state and local taxes, or the death tax. ...If the traditional disclosure of tax returns is elevated into a "teachable moment" about the burdens of double taxation, all Americans could be winners.

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I don't think this makes a good commercial.

Posted by: mike livingston | Jan 25, 2012 3:07:52 AM

Right on WSJ! I expect the next editorial will apologize for the American embargo that caused the Japanese to bomb Pearl Harbor.

Posted by: Publius Novus | Jan 25, 2012 6:34:01 AM

By this rationalle should we not have any consumption taxes either? The company that produced the twinkies already paid taxes; why should I pay a tax to consume it? By extension, the sales tax is ~35% (30% corporate, 5% sales)

Posted by: Michael | Jan 25, 2012 8:02:12 AM

Someone help me. I understand how dividends are double taxed. I also understand that if a corporation realizes a capital gain it may be taxed at the corporate level. But if I as a taxpayer realize a capital gain on stock I've owned, how is that gain double taxed? I get to deduct the basis in my stock when computing the net gain so I'm only paying tax on the gain, not the gross sales. (An argument can be made that long term gains have inflation as an element of the gain and that the government should not tax inflationary gains.)

Posted by: jvermeer | Jan 25, 2012 8:31:43 AM

The biggest complaint is about his combined effective tax rate, which was 'low' because Romney gave massive charitable donations.

Democrats are arguing Romney should have given less to charity!

Posted by: apetra | Jan 25, 2012 8:43:16 AM

Of course, we know pretty much first hand that if it comes from Obama, it is pure hype.

Posted by: GM Roper | Jan 25, 2012 9:13:44 AM

Unbelievable. Does the WSJ not understand that venture capital funds are taxed as partnerships, not as corporations? Does anyone actually believe that the increase in value in the stock of the corporations purchased and then sold by those funds was reflected in internal taxable income?

The authors are either ignorant or intentionally misleading. It is highly unlikely that Mitt Romney's income was actually subject to double taxation of the sort alleged.

Posted by: Theodore Seto | Jan 25, 2012 9:29:08 AM

In order to be 100% true that would require the entire gain in stock value to be 1-to-1 compatible with exactly how much profit that company made, and company's would have to be paying an effective tax rate of 35%. I know, you know, we all know, those are both decidedly false.

AAPL just posted a quarterly profit of $13.87 per diluted share. Since the start of their quarter (10/1/2011) shares have risen from $381.32 to a current price of $446.10, or $64.78 in capital gains. So already stock gains are 467% of profit. Capital Gains tax on that $64.78 increase would be $64.78*0.15 = $9.72

Also, according to their most recent 10-K, AAPL's effective tax rates for 2010 and 2011 were 24.2% and 24.4%. Assuming it stays at 24%, on that $13.87 AAPL is paying $13.87*0.24 = $3.33 in taxes.

So actually, for that $64.78 gain to the investor, the government as a whole is receiving $13.05 in tax, or 20.15%.

Posted by: Ryan | Jan 25, 2012 9:52:00 AM

Theodore Seto

Except for the one small item you overlooked, the government is a partner in the profit but not in the loss. Had the ventures tanked there would be a 100% loss.

Michael you own the Twinkie company? Ponder the difference between getting a profit distribution (dividend that has already been taxed) and a sales tax.

apetra Notice the subtle difference between Obama-Biden and Romney? Mitt gave 15% of his income to charity. Obama gave 1% and that great sport Biden a whopping $369.00 What a guy!

Posted by: cubanbob | Jan 25, 2012 9:54:23 AM

Thanks Ted. The WSJ once again establishes that its op-ed pages are an excellent source of misinformation.

Posted by: Bill | Jan 25, 2012 10:14:15 AM

Another hole. The WSJ takes a 35% tax rate on corporations on its face. We all know that almost all corporations pay less than that, some pay none at all.

So, before we can determine if Romney's tax rate is higher, we have to figure out what the tax rates of the companies he owns was (assuming, of course, that you accept the WSJ's reasoning at all).

Posted by: Allan | Jan 25, 2012 10:17:23 AM

@ GM Roper,

Venture capital/private equity firms make the their money by investing in--you guessed it--corporations. Your argument only makes sense if you refuse to look beyond the first iteration.

That said, the article has a different problem: it assumes that 100% of the incidence of the corporate tax falls on shareholders. Some argue that it is also partly borne by a corporation's employees, customers, and creditors. I'm not going to try to resolve that debate--the economic analysis gets mind-bogglingly complicated unless you're willing to make a few questionable assumptions.

Posted by: Unbranded | Jan 25, 2012 10:19:26 AM

Theodore Seto,

Do you understand what dividends are?

Posted by: the real anon | Jan 25, 2012 10:42:31 AM

Bull. Release Bain's tax records to prove it. I highly doubt Bain paid a 35% tax on venture capital funds or they were taxed as a corporation. By this double taxation logic, if I am a partner in a company and get a profit share, it gets taxed at 35% and then at the wage rate of 30%. So Mitt still makes out way better than the working stiffs.

Posted by: Reality | Jan 25, 2012 10:47:07 AM

> By this rationalle should we not have any consumption taxes either? The company that produced the twinkies already paid taxes; why should I pay a tax to consume it? By extension, the sales tax is ~35% (30% corporate, 5% sales)

No. The corporate tax is on the profits of twinkie-co, not its revenue. Assume 35% tax rate and 10% taxable profit, your $1.05 (after 5% sales tax on $1.00) twinkie includes $0.035 of corporate tax, for a total of $0.085.

BTW - Must be nice to have a 5% sales tax. CA's is over 9% in many jurisdictions.

Posted by: Andy Freeman | Jan 25, 2012 11:45:25 AM

This double taxation argument doesn't make sense to me. The capital gains tax isn't a double tax on the money he used to make the original investment but a tax on the capital gain. It's not double taxation as he didn't previously have the capital gain to get taxed on. If there is no gain there is no tax.

The fact that corporations may have already paid some corporate tax is IRRELVANT as that isn't tax that Mitt Romney himself paid after he already collected his gains.

And as another poster said, by this rationale, there should be no consumption taxes. It is all smoke and mirrors for the ultra-rich to justify their low tax rates while us working suckers have to pay at much higher rates!

Posted by: Truth | Jan 25, 2012 1:12:27 PM

There's a fault in your logic there. The taxes a corporation pays on it's activities are separate from the capital gains realized (or not) over investments in the stock of the company. Also, it's entirely possible to make capital gains in situations where there is no underlying corporation, and thus no underlying corporate tax.

For instance, I could buy a work of art for personal use. It could accumulate in value substantially. If I were to sell it, I would accumulate a capital gain, and pay taxes on that gain. There is no corporation involved, and no corporate tax.

Capital gains result from the transfer of assets. Corporate taxes are generated, generally, by income, by profits. And they are not the same thing, and they're frequently quite separate.

Also, calling the Estate Tax a Death Tax is a complete misnomer. It's not the death being taxed. What's being taxed is the transfer of ownership of assets. And, frequently, the value of an Estate is frequently very, very far removed from having been taxed at all. The vast majority of most large estates is accumulated capital gains, upon which no tax has been paid as the capital has accumulated.

So, you know, a lot of what you're dealing in here is bullshit.

Posted by: Andy Ross | Jan 25, 2012 4:31:16 PM

Prof. Seto raises the same mistaken point that Marty Sullivan of Tax Analysts did in a radio interview I listened to this morning. So what if venture capital funds are organized and taxed as partnerships? If the funds are investing in the stock of C corporations, the dividends and capital gains the funds receive, and pass along to partners like Romney, are by definition subject to double taxation by the time the partners settle up with the IRS. With all respect to Prof. Seto, it takes more than baldly proclaiming that double taxation of Romney's income is "highly unlikely" to overcome logic and common sense.

Posted by: Jake | Jan 25, 2012 5:05:41 PM

If Romney's getting a boost of 35% against his tax rate, then every worker also gets that 35% boost to their taxes. So stuff it.

Posted by: astonerii | Jan 25, 2012 6:11:07 PM

@AndyRoss, the question is not about the effective tax rate on capital gains generally, but the capital gains tax rate for corporate investors, such as Romney. The tax rate of artwork was not at issue.

Also, artwork is classified as a collectible and is subject to a flat 28% capital gains tax rate if owned for more than one year. If it is owned for less than one year, it is taxed at the ordinary tax rate.

Posted by: Response | Jan 25, 2012 7:39:09 PM

Many of you are confusing capital gains with dividend income. Dividends are different from capital gains. They represent payments to stockholders of earnings after tax deductions. They are taxed at 35% at the corporate level before distribution to stockholders -- who then in turn pay a 15% tax (the capital gains rate, but on the dividend). This creates the 44% effective tax rate on corporate dividends.

Posted by: wrick | Jan 25, 2012 7:47:37 PM

@astonerii: No, they don't. Reasonable salaries are deductible business expenses. Since employees are paid with pre-tax dollars, they don't "get that 35% boost".

Posted by: Response | Jan 25, 2012 8:24:12 PM

It seems necessary to discuss why there is such a thing as a capital gain on shares in a corporation. I have heard two explanations: 1) the gain comes from a) a share buyer's expectation of future higher profits for the corporation, leading to a perceived higher value for the shares of the corporation, and b) an owner who wants to sell that future cash flow stream; and/or 2) day traders who use various rational and irrational short term investment strategies drive the price of company shares higher. If #1 is the main driver, then the increased share price is simply the discounted future value of expected profits less expected corporation taxes. Thus capital gains have the expected future taxes imbedded in the gain. In that case, dividends and capital gains are the same as far as corporation taxes. If #2 is the main driver, then people who say capital gains are different from dividends may have a point.

Posted by: Caleb Standafer | Jan 26, 2012 8:27:06 AM