Skip to main content
Part of complete coverage on
 

Why do the Romneys pay so little in taxes?

By Edward J. McCaffery, Special to CNN
updated 6:31 AM EDT, Tue September 25, 2012
Mitt and Ann Romney paid just under $2 million in taxes on income of just under $14 million for 2011.
Mitt and Ann Romney paid just under $2 million in taxes on income of just under $14 million for 2011.
STORY HIGHLIGHTS
  • Mitt and Ann Romney paid an effective tax rate of 14.1% in their 2011 returns
  • Edward McCaffery: Raising the tax rate won't affect the very rich
  • He says very rich Americans do not have to show any "income" on their tax returns
  • McCaffery: Tax spending, rather than work, and the rich will have to pay more taxes

Editor's note: Edward J. McCaffery is Robert C. Packard Trustee Chair in law and a professor of law, economics and political science at the University of Southern California. He is the author of "Fair Not Flat: How to Make the Tax System Better and Simpler."

(CNN) -- By now, most of us have probably heard that Mitt and Ann Romney paid just under $2 million in taxes on income -- virtually all from investments -- of just under $14 million for 2011, an effective tax rate of 14.1%. This is a low tax rate, lower than the typical middle-class American worker pays, especially when one considers payroll taxes, the largest burden for most Americans. It should concern us that individuals of Romney's wealth -- analysis has put his personal fortune as high as $250 million, not counting some $100 million in trusts set up for his five children -- pay so little as a percent in taxes.

It is also correct to note that there appears to be nothing wrong or illegal in the tax returns that Romney released. Sure, there are still many unanswered questions, and speculation and innuendo will no doubt continue.

But all of that is beside the point, or ought to be.

Edward J. McCaffery
Edward J. McCaffery

Romney is really rich. It is what it is. The real attention should be on a tax system that allows the really rich to pay so little in percentage terms and on the best solution to making that tax system better and fairer.

Opinion: Republicans risk being the party of mean

The knee-jerk reaction is to raise tax rates, as in the so-called Buffett Rule: Anyone earning more than $1 million should pay an effective rate of at least 30%. If this rule were in place today, it would more than double the Romneys' income taxes.

Only, it wouldn't. The Buffett Rule wouldn't work, because really rich Americans do not have to show any "income" on their tax returns.

'SNL': Romney pays less than you tip
Mitt Romney's tax tease
Romney's summary of returns for 20 years

The Romneys paid tax because they hold stocks and securities yielding dividends and interest, and because they sold assets generating capital gains. They didn't have to do so. The simple strategy of the super-rich is to buy and hold, and to borrow when needed to finance their lifestyles.

Some basic facts: Any tax consists of a base, or what is being taxed, times a rate. The income tax's base is "income," which comes from labor or wealth. Income from labor is hard to hide and easy to tax, as the middle class knows full well. Income from wealth is easy to hide and hard to tax -- and perfectly legally.

A non-dividend-paying stock, like Buffett's Berkshire Hathaway (or land, artwork, sports franchises), does not have to show any taxable income. People who own such things can be very rich and live very well. If we simply raised tax rates, the super-rich would just as simply stop showing income or selling assets. That's why, under an income tax, we pretty much have to have low rates on investment.

Does this strike you as unfair? If you're like most Americans -- i.e., if you're middle class -- then your blood may be boiling at the fact that the super rich seem to be able to hold us all hostage to low tax rates under an income tax. The important question is -- how do we fix this?

The answer lies in switching the tax base before we raise the tax rates. Tax spending, rather than work or savings. Then, we could apply a 30% or higher rate to spending at Romney's level.

The real inequity shown by the Romneys' tax situation, after all, is measured by the taxes they pay as a percent of their spending or lifestyle. For most Americans, living paycheck to paycheck, spending (after taxes) pretty much equals income (after taxes). It's a good guess that the Romneys are spending a great deal more than the income they are showing on their tax returns.

They should be, if they are well-advised (and if they are not well-advised, we have other concerns). What would Romney be spending money on? How about running for president, for one thing. Romney spent $45 million of "his own" money running for president in 2008 (less than the $60 million Ross Perot allegedly spent in 1992). I suspect that Romney has spent more of his own money this time around, if only because he has gone further and been more successful in his quest.

Opinion: Obama, Romney and your pay

Here is another turn of the screw. Running for president is legally considered a personal expense, nondeductible under the income tax. Such expenses, however, are in essence deductible from another American tax, and the largest single one facing the Romneys: the gift and estate tax. That so-called death tax applies to what is left over on one's deathbed.

The simplest way to avoid it is to spend all that you have and die broke. Under current law, Romney's family would have to pay about $80 million in estate taxes after his and Ann's death. If Romney spent $45 million in 2008, at that year's estate tax rate, his family would have saved more than $20 million in taxes because of his presidential run (no need to discount for present value, as the unspent wealth would have appreciated in value). In sum, the government is pitching in, in the form of foregone estate tax revenue, for Romney's and other rich people's presidential runs.

It is ironic that the real problem with Romney's personal financial situation is his spending, not his work or savings, and that no one is paying attention to that. Excessive spending at all levels is our national problem, and it is what soon might make us another Greece. No one is paying much attention to that, either.

Meantime, we have a tax system set up to encourage spending and borrowing, especially by the rich. The only way to raise taxes under today's income tax is to increase the burdens on working and saving -- just about the last things we should be doing.

If we taxed spending, in contrast, the Romneys and other really rich families would see their taxes increase in absolute and percent terms. Yet we oppose consumption or spending taxes because we perceive them as regressive. It's all nearly perfectly perverse, and not a peep on point. Welcome to politics.

Follow us on Twitter @CNNOpinion

Join us on Facebook/CNNOpinion

The opinions expressed in this commentary are solely those of Edward J. McCaffery.

ADVERTISEMENT
Part of complete coverage on
updated 3:41 PM EDT, Wed July 30, 2014
Stuart Gitlow says pot is addictive and those who smoke it can experience long-term psychiatric disease.
updated 12:45 PM EDT, Wed July 30, 2014
Gabby Giffords and Katie Ray-Jones say "Between 2001 and 2012, more women were shot to death by an intimate partner in our country than the total number of American troops killed in the Iraq and Afghanistan wars combined."
updated 7:57 PM EDT, Tue July 29, 2014
Alan Elsner says Secretary Kerry's early cease-fire draft was leaked and presented as a final document, which served the interests of hard-liners on both sides who don't want the Gaza war to stop.
updated 7:58 AM EDT, Wed July 30, 2014
Vijay Das says Medicare is a success story that could provide health care for everybody, not just seniors
updated 2:18 PM EDT, Wed July 30, 2014
Rick Francona says Israel seems determined to render Hamas militarily ineffective.
updated 1:43 PM EDT, Wed July 30, 2014
S.E. Cupp says the entrepreneur and Dallas Mavericks owner thinks for himself and refuses to be confined to an ideological box.
updated 9:11 AM EDT, Wed July 30, 2014
A Christian group's anger over the trailer for "Black Jesus," an upcoming TV show, seems out of place, Jay Parini says
updated 4:28 PM EDT, Wed July 30, 2014
LZ Granderson says the cyber-standing ovation given to Robyn Lawley, an Australian plus-size model who posted unretouched photos, shows how crazy Americans' notions of beauty have become
updated 3:39 PM EDT, Wed July 30, 2014
Carol Dweck and Rachel Simmons: Girls tend to have a "fixed mindset" but they should have a "growth mindset."
updated 7:56 AM EDT, Mon July 28, 2014
A crisis like the Gaza conflict or the surge of immigrants can be an opportunity for a lame duck president, writes Julian Zelizer
updated 2:22 PM EDT, Sat July 26, 2014
Carol Costello says the league's light punishment sent the message that it didn't consider domestic violence a serious offense
updated 8:51 AM EDT, Mon July 28, 2014
Danny Cevallos says saggy pants aren't the kind of fashion statement protected by the First Amendment.
updated 2:52 PM EDT, Mon July 28, 2014
Margaret Hoover says some GOP legislators support a state's right to allow same-sex marriage and the right of churches, synagogues and mosques not to perform the sacrament
updated 2:31 PM EDT, Mon July 28, 2014
Megan McCracken and Jennifer Moreno say it's unacceptable for states to experiment with new execution procedures without full disclosure
updated 1:44 PM EDT, Wed July 30, 2014
Priya Satia says today's drones for bombardment and surveillance have their roots in the deadly history of Western aerial control of the Middle East that began in World War One
updated 12:35 PM EDT, Mon July 28, 2014
Jeff Yang says it's great to see the comics make an effort at diversifying the halls of justice
updated 11:55 AM EDT, Sat July 26, 2014
Rick Francona says the reported artillery firing from Russian territory is a sign Vladimir Putin has escalated the Ukraine battle
updated 2:22 PM EDT, Sun July 27, 2014
Paul Callan says the fact that appeals delay the death penalty doesn't make it an unconstitutional punishment, as one judge ruled
updated 6:25 PM EDT, Thu July 24, 2014
Pilot Robert Mark says it's been tough for the airline industry after the plane crashes in Ukraine and Taiwan.
updated 11:10 AM EDT, Fri July 25, 2014
Jennifer DeVoe laments efforts to end subsidies that allow working Americans to finally afford health insurance.
updated 11:33 AM EDT, Sat July 26, 2014
Ruti Teitel says assigning a costly and humiliating "collective guilt" to Germany after WWI would end up teaching the global community hard lessons about who to blame for war crimes
updated 8:45 AM EDT, Fri July 25, 2014
John Sutter responds to criticism of his column on the ethics of eating dog.
updated 9:02 AM EDT, Fri July 25, 2014
Frida Ghitis says it's tempting to ignore North Korea's antics as bluster but the cruel regime is dangerous.
updated 2:50 PM EDT, Fri July 25, 2014
To the question "Is Putin evil?" Alexander Motyl says he is evil enough for condemnation by people of good will.
updated 2:03 PM EDT, Thu July 24, 2014
Laurie Garrett: Poor governance, ignorance, hysteria worsen the Ebola epidemic in Sierra Leone, Guinea, Liberia.
updated 9:49 AM EDT, Thu July 24, 2014
Patrick Cronin and Kelley Sayler say the world is seeing nonstate groups such as Ukraine's rebels wielding more power to do harm than ever before
updated 6:05 PM EDT, Wed July 23, 2014
Ukraine ambassador Olexander Motsyk places blame for the MH17 tragedy squarely at the door of Russia
updated 7:42 AM EDT, Thu July 24, 2014
Mark Kramer says Russia and its proxies have a history of shooting down civilian aircraft, often with few repercussions
updated 2:53 PM EDT, Thu July 24, 2014
Les Abend says, with rockets flying over Tel Aviv and missiles shooting down MH17 over Ukraine, a commercial pilot's pre-flight checklist just got much more complicated
updated 9:17 AM EDT, Thu July 24, 2014
Mark Kramer says Russia and its proxies have a history of shooting down civilian aircraft, often with few repercussions
updated 12:37 PM EDT, Thu July 24, 2014
Gerard Jacobs says grieving families and nations need the comfort of traditional rituals to honor the remains of loved ones, particularly in a mass disaster
updated 10:13 AM EDT, Thu July 24, 2014
The idea is difficult to stomach, but John Sutter writes that eating dog is morally equivalent to eating pig, another intelligent animal. If Americans oppose it, they should question their own eating habits as well.
updated 12:30 PM EDT, Wed July 23, 2014
Bill van Esveld says under the laws of war, civilians who do not join in the fight are always to be protected. An International Criminal Court could rule on whether Israeli airstrikes and Hamas rocketing are war crimes.
updated 8:09 AM EDT, Wed July 30, 2014
Gordon Brown says the kidnapped Nigerian girls have been in captivity for 100 days, but the world has not forgotten them.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT