The clown show of the GOP primary season has been both depressing and comprehensively covered elsewhere, so I have stayed away from commenting. But Romney’s claim yesterday that his tax rate is actually 50% was too blatant to let pass. Since it’s also likely that the underlying facts that make the claim patently ridiculous might escape the press, so I thought I would offer this.
Per Josh Marshall, Romney’s new claim is that his effective tax rate is not 13.9% but 50%. He gets to this number by claiming that corporations pay taxes on their income (with a nominal rate of 35%, on which more in a moment) before it is passed on to shareholders, who then pay a 15% capital gains tax. This tissue-thin logic falls apart immediately when looked at closely for a few reasons.
To see why, it’s helpful to consider the case in which it makes some kind of sense. If I hold public shares in XYZ Pharmaceuticals, then as a corporation, XYZ will pay income tax on its earnings. The quarterly dividend from XYZ to me is then taxed as income on my personal taxes. So in this case, yes, the same revenue stream is taxed twice. I hardly find this so outrageous, but there is a (lame) argument to be made here.
But this is the rub with Romney’s vapid claim – almost none of these conditions apply to his income. First of all, it comes from private trusts, each of which is organized as an LLC, which makes it a pass-through entity. So clearly those “companies” of which he is a direct shareholder don’t pay taxes anyway. And as for the underlying portfolio companies, I’m not a tax expert, but I would be shocked if they pay much income tax given that private equity tends to buy firms specifically to take them private to maximize their own tax benefit. One of the ways private equity firms do this is by loading the companies up with debt that enables them to avoid paying taxes on the debt interest payments (just like individuals with home mortgages).
It is likely the case that Romney’s portfolios also include shares of public companies as well, which are theoretically subject to that 35% income tax. But show me a major public company that actually pays 35% income tax and I’ll show you a unicorn.
I’ll close by noting what makes this truly offensive. When I had my company up and running and was based in New York City, as a Manhattan resident I was subject to an absurd mix of taxes. James Stewart summarizes the situation nicely in an article this week (h/t Atrios):
Equally rankling to many is New York City’s unincorporated business tax, which is “charged to every individual or unincorporated entity carrying on a trade, business or profession — in whole or part — in New York City,” according to the New York City Department of Finance. “I despise it,” Mr. Willens said. (As head of his own firm, Robert Willens L.L.C. in New York City, he pays the tax.) “You’ve already paid federal, state and local income tax on the same income. It’s double taxation. It’s odious. I hate it. The self-employed are supposed to be the backbone of the economy. They’re treated very harshly. I guess there’s no organized lobby for the self-employed.”
The unincorporated business tax is the same rate that is applied to business owners, just named differently to catch the self-employed. That is how actual small business owners – not the plutocrats that are shoved under that rhetorical umbrella – are treated in New York, which also adds on taxes like a payroll-based surcharge for the MTA (whether your employees use it or not), one of the highest UI tax rates in the country, etc. It all adds up to an effective tax rate well north of 50%, while the giant companies with headquarters in midtown – and their owners, like Romney – pay significantly less.
I should also add that this was frustrating but ultimately seemed fair to me. Unlike Stewart, I had a business to run, and I think it’s fair to say that I couldn’t have found the employees I needed to make the business work anywhere else, and I certainly would not have been as close to the fund management clients I worked with. What rankles is the patent lying by those who have never paid these taxes and never will.