* Romneys' income comes from investments, not wages
* Low effective tax rate reflects tax code preference
* Romney benefits from private equity "carried interest"
WASHINGTON, Sept 21 (Reuters) - Living off your investments
is a much better deal tax-wise in the United States than living
off of a paycheck, as Mitt Romney's 2011 tax return underscored
on Friday.
Days after a secret video showed him scorning the almost 47
percent of Americans who pay no federal income taxes, the
Republican presidential challenger disclosed that his 2011
federal tax bill was $1.9 million.
That is a lot of money by any standards, but on an effective
basis, Romney's tax rate last year was 14.1 percent. That was
much lower than President Barack Obama's, at 20.5 percent, and
that of Romney's running mate, Paul Ryan, at 20 percent.
The main reason: Both Obama and his wife, Michelle, and Ryan
and his wife, Janna, got about half of their 2011 income from
wages. Not so for Romney and his wife, Ann.
The Romneys' 2011 tax return showed adjusted gross income of
$13.7 million: $3 million from taxable interest; $3.6 million
from dividends; $6.8 million from capital gains; and the balance
from other sources. Their wage income? Zero. That largely
explains their low effective tax rate compared with that of the
Obamas.
Why? The United States over the past 30 years has
deliberately favored investment income over wage income, which
is taxed at a top rate of 35 percent. In a combination of
trickle-down economic theory and raw political power, U.S.
investors have won preferred tax-code treatment.
That code has not been fully overhauled in 26 years. In that
time, many interest groups have loaded it down with loopholes,
exemptions, credits and other complexities, each with political
allies determined to protect it. Some of those tax breaks
benefit the poor and the middle class, and some the wealthy.
TAXES AND THE ELECTION
The outcome of the Nov. 6 presidential election will go a
long way toward deciding if a thorough tax code overhaul will be
attempted in years ahead and, if so, what it will look like.
Take carried interest, for instance, a major source of
income for Romney.
One of the wealthiest Americans ever to run for the White
House, the former Massachusetts governor built a fortune buying
and selling companies at Bain Capital as a private equity
financier. Those lucrative years gave Romney a tax advantage.
His campaign said in January he got $13 million in income
over the last two years from "carried interest," a form of
earnings available under the tax code to private equity partners
and some hedge fund managers.
The returns show that Romney still has an interest in funds
through Bain Capital. The Ann D. Romney Blind Trust lists a long
list of Bain-related transactions, for example.
Carried interest is taxed at the 15 percent investment
income-tax rate, not the higher ordinary tax rate.
Private equity partners say that is appropriate because
there are risks involved in their work. Critics say carried
interest is actually closely comparable to wage income.
Obama has proposed curbing the carried interest tax break
and taxing these gains at the ordinary income rate, while
Romney's position on the issue is still unclear.
Romney's effective tax rate is lower than many high-income
wage earners "because of the 15 percent rate on dividends and
capital gains and also the fact that much of that income likely
comes from carried interest," said Duke University tax law
professor Lawrence Zelenak.
The 2011 returns show the Romneys' effective tax rate would
have been just over 10 percent if they had taken the full
charitable-giving deductions to which they were entitled.
Effective tax rates vary wildly from person to person due to
the code's complexity. But counting all U.S. taxpayers, the
average income tax rate is 11.8 percent, according to the Tax
Foundation, a think tank in Washington, citing Internal Revenue
Service data for 2010.
In 2011, about 46 percent of Americans paid no federal
income tax, most of them because they were poor or elderly,
according to the Tax Policy Center, another think tank.
Almost two-thirds of those who paid no federal income tax
did pay federal employment taxes that support the Social
Security pension system and the Medicare health program.
Romney's 2011 return also shows a web of investments
stretching from the United States to tax-haven jurisdictions
such as the Cayman Islands, Luxembourg and the Netherlands.
"This doesn't strike me as a tax situation you'd want to be
in if you're running for president - to have pages and pages of
these foreign investments. There are many mysteries to these
returns," said Zelenak.
(Additional reporting by Kim Dixon and Patrick Temple-West;
Editing by Peter Cooney)