Few Americans pay full tax rate

Romney case puts tax code in focus

Mitt Romney has shifted tactics, attacking Newt Gingrich directly rather than leaving it to surrogates.
Joe Raedle/Getty Images
Mitt Romney has shifted tactics, attacking Newt Gingrich directly rather than leaving it to surrogates.

Mitt Romney’s disclosure this week that he probably pays close to a 15 percent income tax rate is the latest reminder that most Americans pay far less than the official income tax rates, taking advantage of various wrinkles in the tax code as well as deductions for everything from children to charity.

Wealthy taxpayers like Romney and billionaire Warren Buffett generally pay lower effective tax rates because of laws that tax investment income, which accounts for the bulk of their earnings, at lower rates than wages or salaries. Lower-income and middle-class families benefit from a number of deductions and credits for children, education, housing, and other areas.

In fact, nearly half of US taxpayers will probably pay no taxes at all for 2011, including 24,000 in the top 1 percent of incomes, according to the Tax Policy Center, a think tank in Washington. Some low-income families even get back more than they pay because of the Earned Income Tax Credit and other programs.


The average tax filer, earning just over $65,000 a year, pays about 9 percent in US income taxes, even though couples who earn that much would fall in the 15 percent tax bracket and individuals in the 25 percent bracket.

Get Talking Points in your inbox:
An afternoon recap of the day’s most important business news, delivered weekdays.
Thank you for signing up! Sign up for more newsletters here

“A negligible percent of the population actually pays an effective tax rate at or above’’ the highest rate for their income bracket, said David Logan, an economist with the Tax Foundation, a nonprofit research organization.

Romney, the front-runner for the Republican presidential nomination, has come under fire from rivals for his leadership of the Boston private equity firm Bain Capital, which earned huge profits by buying and selling companies, and sometimes laying off workers. His opponents have also pressed him to release his tax returns, which he has not done so far. He has promised to release his 2011 returns in April.

Romney, who amassed a fortune of as much as $250 million and continues to earn millions from investments and other sources of income, responded to a reporter’s question Tuesday by saying he pays close to 15 percent of his earnings in federal income taxes.

Congress decreed a decade ago that the wealthiest Americans pay a top income tax rate of 35 percent. But as Romney shows, hardly anyone - even billionaires and multimillionaires - pay anywhere close to that.


Romney said the bulk of his income is taxed at the 15 percent rate for long-term capital gains for dividends and other investment returns, rather than the ordinary rates for salaries and other wages. Typically, most of the pay for hedge fund managers, venture capitalists, and private equity executives is structured as investment earnings, so they pay the lower capital gains rate.

Romney isn’t alone. Buffett, chairman of Berkshire Hathaway Inc., recently said he paid just 17.4 percent of his taxable income in taxes, largely because most of his earnings come from investments rather than salary.

Overall, the top 1 percent of American earners pay about 18.5 percent of their income in income taxes - about half the official rate of 35 percent, according to the Tax Policy Center. Only a tiny fraction of top earners probably pay the full 35 percent, said Logan.

Income taxes are just one type of federal tax. Many Americans, especially those earning low salaries, pay more in other US taxes, such as the payroll tax to support Social Security and Medicare, than they do in federal income taxes. The average American, for instance, pays 18 percent in total federal taxes, double the amount for income taxes alone, the Tax Policy Center estimated.

But Romney probably only pays a tiny percentage of his income in payroll taxes because they don’t apply to investment earnings, Logan said. That means 40 percent of Americans may pay the government a bigger share of their income than Romney when all federal taxes are taken into account, Logan estimated.


Romney’s disclosure prompted some Democrats to renew the push to force private equity executives and other fund managers to pay ordinary income tax rates - rather than lower capital gains rates. US Representative Sander Levin, a Michigan Democrat who has previously introduced legislation to force this change, vowed yesterday to reintroduce his bill after hearing about Romney’s comments.

“Regardless of whether compensation is earned managing investments or providing some other service, it should be taxed at the same rates paid by everyone else in the US,’’ Levin said. “First and foremost, Americans expect fairness in our tax code and getting rid of this loophole will bring us a significant step closer to making that happen.’’

Levin’s legislation passed the House, when it was controlled by Democrats, but stalled in the Senate, where the bill was blocked by Republicans, including Scott Brown of Massachusetts, and some Democrats. Brown’s office did not return messages seeking comment.

The subject is likely to come up again in negotiations to extend a temporary reduction in payroll taxes, which expires at the end of next month.

Romney also probably benefited from an array of federal deductions that could push his effective tax rate even lower than 15 percent, said Morris N. Robinson, a Boston tax attorney. Robinson ticked off a list of strategies, including the use of investment losses to offset capital gains. He said he has used similar tactics to help his own clients.

“It’s completely legitimate,’’ he said, “but it means the highest rates that are advertised are not necessarily what people pay.’’

Todd Wallack can be reached at Follow him on Twitter @twallack.