Romney’s Money Gaffe

The Republican frontrunner's statements yesterday about his earnings and taxes went over like a platinum balloon.

Mitt Romney’s statements yesterday about his earnings and taxes went over like a platinum balloon.

ABC News (“Romney Reveals His Tax Rate Is ‘Probably Closer to 15 Percent’“):

Mitt Romney revealed for the first time today that his effective tax rate is “closer to 15 percent,” suggesting that he pays less in taxes than many middle income Americans despite being worth an estimated $250 million.

“What’s the effective rate I’ve been paying? It’s probably closer to the 15 percent rate than anything,” Romney said during a press conference after an early morning rally. “Because my last 10 years, I’ve…my income comes overwhelmingly from some investments made in the past, whether ordinary income or earned annually. I got a little bit of income from my book, but I gave that all away. And then I get speakers fees from time to time, but not very much.”

This will, quite reasonably, reignite the debate over the so-called “Buffet Rule” (the idea that the very highest earners ought to pay at least as high a percentage of taxes as their secretaries) and the differential treatment between regular income (“earned income,” in IRS parlance) and money earned from stocks and other investments (“unearned income”).

When the topic first came up some months back, I argued that it makes sense to treat true investment income differently than salary income, since the former carries risk and often accrues over years of deferred gratification. The caveat, though, is that we should differentiate investments from “investments.” That is, CEO pay disguised as stock options and held for short periods are really just salary. And the “carried interest rule,” which applies to those like Buffett who make their money as fund managers and pretends that the money they invest for others is their own investment, is pure rent seeking and therefore a loophole we ought to close.

I haven’t spent enough time researching Romney’s residual income from Bain Capitol to have any strong view on how it should be taxed. My instant reaction, though, is that it’s probably closer to “investment income” than investment income.

I will say, however, that the way the “15 percent” figure has been treated in the press is largely inaccurate. ABC News is at least technically correct when it allows that “he pays less in taxes than many middle income Americans” (emphasis mine) rather than the more widespread declaration that this is less than the average middle income earner pays. It just ain’t true.

I don’t have more recent figures but this chart, dated 11 April 2011, by the Tax Policy Center (a coalition of the liberal Urban Institute and center-left Brookings Institution) shows the “Historical Effective Federal Tax Rates for All Households” over the years:

As you can see, those in the middle quintile pay an effective federal tax rate of 14.3 percent in 2007, the most recent year available. Those in the lower quintiles pay much less. More importantly, those in the top quintile pay much more–and the top 1 percent more still.

And those figures include FICA. The effective individual income tax rate is far, far smaller for all concerned:

As you can see, the bottom two quintiles actually pay a negative income tax–that is, their deductions exceed their tax liability and they get money back from the government through the Earned Income Tax Credit and other mechanisms–and even the third and fourth quintiles pay less in federal income tax than they do in state and local sales taxes. Even the upper quintile actually pays less than Romney’s 15 percent.

Romney is also catching flak for this line:

 ”I got a little bit of income from my book, but I gave that all away. And then I get speakers fees from time to time, but not very much.”

It turns out that the “not very much” is more than most of us make from all income sources combined: $374,000.

Now, that’s easily explainable. First, $374,000 is indeed “not very much” in terms of Romney’s overall income. Second, Romney was likely brought up to downplay how much money he had so as not to rub other people’s noses in it.

While understandable, though, it was a terrible gaffe from an ordinarily quite disciplined campaigner on perhaps his core vulnerability–especially in the current political and economic climate. I’m shocked that Romney wasn’t better coached on the rollout of his income tax statement.

Is this gaffe going to do permanent damage? Probably not. I’d argue it’s far less damaging Barack Obama’s April 2008 declaration that working class Americans “ get bitter, they cling to guns or religion or anti-pathy to people who aren’t like them, or anti-immigrant sentiment or anti-trade sentiment as a way to explain their frustrations.” Obama obviously survived that one, going on to win the nomination and coast to the presidency.

But, damn, it was a dumb thing to say.

FILED UNDER: Campaign 2012, US Politics
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. sam says:

    But, damn, it was a dumb thing to say.

    It’s what happens when a Stepford candidate’s controllers take their eyes off the monitor.

  2. OzarkHillbilly says:

    It turns out that the “not very much” is more than most of us make from all income sources combined: $374,000.

    As I said over at Doug’s thread about this, I wish I could find suckers like the one’s Mitt finds.

  3. Rob in CT says:

    Somewhat off-topic:

    http://www.rollingstone.com/politics/blogs/national-affairs/what-mitt-romney-learned-from-his-dad-20120117#ixzz1jkRgDrV6

    Fascinating, really. I didn’t know anything about George Romney. The picture of him painted in that article is glowing – and I find myself pining for a 2012 version. But Mitt doesn’t seem to be it (and the article takes a shot at explaining why. I dunno – it’s psychoanalysis, of course – but it seems plausible… and very, very sad).

  4. Good summary. I appreciate the proper framing of carried interest, of course.

  5. michael reynolds says:

    Yes it hurts. Fatal? No. But all this — Bain’s rapacity, Income Tax returns, 10,000 bets — undercut Mr. Romney’s ability to cite his history as an asset. If it’s become a slightly bitter joke then it’s no longer an asset. And it’s not like Mr. Romney has anything else to cite. The Olympics? Please. His unpopular governorship? Romney Care?

  6. JKB says:

    Apparently, Mitt inherited his daddy’s ability to really speak to his audience. Hey, Mitt, you need to learn to see other people’s perspective then you’ll avoid these gaffs.

    One clarity comment “….and they get money back from the government …” A lot of people think they get money from the government when they get their free loan returned from the excess withholding. I would suggest to make you point, this should be “…and they get more money than was withheld from their pay back from the government…”

    One of the greatest scams was withholding. The people don’t feel the taxes because it is taken off the top rather than after they’ve taken ownership of their pay. It has worked so well, we have commercials of people celebrating getting the overpayment they loaned the government interest free returned to them. Except of course, in California and illinois where the government could not pay back the loans when they came due the last few years.

  7. Fiona says:

    I have to agree with Michael. These statements, in and of themselves, aren’t particularly harmful but when you add them together with a bunch of other inartful statements Romney has made in the past (and will likely to continue to make in the future), the picture you get is that of somebody woefully out of touch with most of the electorate. Kind of when Bush I was amazed by grocery store price scanners.

    The one place where Romney seems closest to telling the truth is in his defense of great wealth, those who have it, and those who want to keep as much of it as possible. I’m not sure how well this will play, especially given how fake he is overall.

    I second Rob’s recommendation of the Rolling Stone article on Romney and his dad. Well worth the read. Mitt’s a pale and wimpy imitation of his father.

  8. Gromitt Gunn says:

    @JKB:

    ne clarity comment “….and they get money back from the government …” A lot of people think they get money from the government when they get their free loan returned from the excess withholding. I would suggest to make you point, this should be “…and they get more money than was withheld from their pay back from the government…”

    That wouldn’t provide clarity, it would be muddying the waters. The bottom two quintiles have a negative federal income tax due to refundable tax credits such as the EITC and the Child credit. This is completely separate from the topic of income tax withholding.

  9. ponce says:

    MItt Romney is a terrible human being.

    Obama spanks the Mishugina! Mormon by 20-30 million votes.

  10. I was thinking recently about if the problem isn’t that the idea of encouraging investment with lower capital gains taxes isn’t inherently flawed. The big problem is that it leads to situations like this were people can earn millions on capital gains and pay a far lower rate than a middle income salary worker.

    But if you think about it, the flaw is deeper than that. Capital gains only come into existence when someone is pulling money out of an investment, so that actually is rewarding the opposite of what we really want to encourage. Instead of rewarding on the backend of an investment (and even then only on investments that were already successful), maybe we ought to charge capital gains as normal income, but provide the incentive upfront.

    That is, the drop from the 39% to the 15% rate represents an incentive of roughly 60%. Why not say that when you buy stock/bonds/etc, you can deduct 60% of the purchase price from that year’s income, but when you sell it, the capital gains are treated as normal income for that year.

    Thus you still get the incentive to invest (and you get it even if the investment ends up not panning out), but people who live of capital gains still pay a normal share of income. And as a bonus, it deals with the “pay disguised as investments” problem you mention since someone getting stock options for zero, like a CEO, doesn’t get to deduct anything.

  11. Hey Norm says:

    How come Fiona has a picture now?
    What do I have to do to get a picture?

  12. James Joyner says:

    @Hey Norm: Just sign up for a Gravatar, upload whatever image you want, and use the same email here.

  13. DRS says:

    I’m starting to wonder if his personal wealth is one topic that Romney has ruled off-limits for his campaign staff to talk about with him – that’s it’s too personal for people to give him advice about. I don’t know but it’s hard to reconcile his tin ear for his personal money with the otherwise smoothly running of his campaign.

  14. PD Shaw says:

    @Stormy Dragon: “Capital gains only come into existence when someone is pulling money out of an investment, so that actually is rewarding the opposite of what we really want to encourage”

    I think that’s a limited view of what happens. People don’t make the initial investment of either capital or labor unless they can later pull it out, or believe they will be able to pull it out with a reasonable return over taxes.

    Also, Romney’s compensation is from a retirement plan in which the remaining equity partners appear to have bought him out. I suspect the longterm payout was for the benefit of the buying partners. In other words, Romney’s capital gain was the partner’s investment and if you start messing with the tax treatment of his capital gain, you may make the partners themselves uninterested in making the investment, or encourage them all to sell the business to a larger firm.

  15. Fiona says:

    @Hey Norm:

    How come Fiona has a picture now?

    I finally figured out the whole gravatar thing. Only took me a few months.

  16. Hey Norm says:

    @ James/Fiona…
    Gotchya…upon further review…I think the empty white box kinda resembles me.

  17. @PD Shaw:

    People don’t make the initial investment of either capital or labor unless they can later pull it out, or believe they will be able to pull it out with a reasonable return over taxes.

    I get that, but by providing the incentive at the time the asset is sold, you’re providing the most benefit to the investments that were already wildly profitable (that is the ones least likely to need additional incentive). It also doesn’t incentive risk taking because if your investment goes south, you get nothing. It also can’t simulate investment during economic downturns (that is, we couldn’t increase investment by temporarily lowering the capital gains tax to 10%, because that would make people pull money out).

    By putting the incentive when the asset is bought, rather than sold, we still increase the ultimate return, but in a way that benefits all investors benefit (particularly the marginal cases where the incentive makes the difference between the investment happens or not happens rather than just investments that were going to happen anyways) and can be used for stimulative purposes (if we temporarily increase the capital purchase write off, anyone sitting on the sidelines with cash may be persuaded to jump in to take advantage of the better rates). It also makes it harder to game the system, as I noted earlier.

  18. @Stormy Dragon:

    And just to link back to an earlier post, note that what I’m suggesting here is that we replace a demand-side incentive (the cut on captial gains taxes) with a supply-side incentive (writeoffs on capital investments), and the supposedly supply-side conservative is the one poo-pooing the idea.

    Hence my earlier point that most Republicans who claim to support supply-side policies have no idea what “supply-side” actually means.

  19. tyndon clusters says:

    I guess those men and women in uniform defending our freedom and having their salaries taxed as “income” at rates far higher than capital gains incur far less risk than the Bain keyboard bombers.

    I would just love it if a service person would go to a town hall and ask Mittens which risk is higher, “going into Fallujah in a Humvee” or buying junk bonds from Drexel.

    This glorifying the rich which is the true religion of the conservatives borders on psychological neurosis.

  20. Drew says:

    It probably was a stupid thing to say, but it also highlights how few people understand the private equity world, and, based upon comments, how few desire to understand private equity economics and beneficiaries of the activity.

    The analogy is always made in the tax debate to mutual fund managers fees, which are taxed at OI rates. The proper analogy, the management fees a PE firm uses to run its affairs and pay people are similarly taxed at OI rates. However, carried interest and capital gains made on money invested by the partners is taxed at cap gains rates. Capital investment seems to be somewhat understood by all but the most harsh demagogues. The misunderstanding on carried interest is that it’s not just investment advice. Mutual fund managers pick stocks or bonds from the tables of the Journal and are passive, if talented, advisors. PE funds actively run the companies. from sourcing them, to hiring and firing managers, to strategy setting and operational optimization, to financing and exit. In essence they are running a business just like an owner. And business owners get cap gains treatment on gain because the activity has been deemed worthwhile economically. I understand all the envy etc. but if people want to argue for OI treatment of carried interst they need to similarly argue for OI treatment on the gains from the owners of the ABC widget company. And that would be a dumb policy IMHO.

    Which brings me to my next point. You would think, from press accounts and commenters that the only beneficiaries are PE partners. No one stops to think that the limited partners in these funds in large part are academic and research endowments, state pension funds, union pension funds, corporate pension funds, teachers pension funds etc Funny that they are exempted for their evil ways in being beneficiaries of the activity. Bloomberg posted a figure they (illicitly) obtained from a Bain fund offering. It showed a rate of return of 82%. How do the union and teachers pensioners like Bain now?

  21. Rolly says:

    @Drew:

    PE funds actively run the companies. from sourcing them, to hiring and firing managers, to strategy setting and operational optimization, to financing and exit. In essence they are running a business just like an owner. And business owners get cap gains treatment on gain because the activity has been deemed worthwhile economically.

    They do? Business owners get cap gains treatment on the profits of the business? Or does ‘gain’ mean something else there. How does that work?

    Oh, and this is tiresome: ” I understand all the envy”

  22. @Drew:

    In essence they are running a business just like an owner. And business owners get cap gains treatment on gain because the activity has been deemed worthwhile economically.

    No, they’re running a business like an executive, and excutives pay income tax rates on their salaries.

  23. @Drew:

    Normally an “investment” has capital at risk. Your defense seems to be that since these folk act “as if” they had capital at risk, they should receive benefits as if they do.

    Why? Are they less likely to run funds and attempt profit, again, with other people’s money?

  24. (The actual investors, those who would put capital at risk, seem to be the group who would need inducement …. if you believe in that kind of thing.)

    Me, I believe in a free market, with consumption and investment treated equally.

  25. Drew says:

    Rolly – not to be a prick, but you don’t understand the basic accounting. If a business distributes capital there is one treatment, dividends or interest another. So let’s say the XYX widget company makes profits for 20 years and distributes dividends along the way. OI treatment. When the business is sold the tax basis in the company vs the sale process price determines the capital gain. And that gets cap gain tax treatment. You may find the “envy” issue tiresome, but I find complete and absolute ignorance of basic business, accounting and industry issues tiresome as well. But thank you for playing.

    Stormy –

    No, they operate it like owners. They are owners. Period. Again, if you want to see owners tax treatment of cap gains OI I think you should make that argument. good luck on the merits. Diversionary arguments are weak. And you really need to consider the consequences.

    Jp – “normally an ‘investment’ has capital at risk”.

    Things get more complicated than the Everyman perceives because of Bains extraordinary performance. That said, funds have what is known as the “GP Commitment.”. That is, what the Partners put in. It can vary wildly. In some funds it’s 3-4%. Sometimes it’s half the fund. And as a rule of thumb, about 10% of net worth is a number LPs look for. Given the investment period vs harvesting dynamics, that means a partner might have 20% of their net worth in risky, illiquid investments. (if you want to play, Jp, there’s a slot for you, Mr Ballsy investor. Snicker).

    But further, and to the active investment aspect of this business and carried interest, this is the whole point. PE guys aren’t passive stock pickers. This is their entire business which they intend to grow and prosper. It’s no different than the XYZ Widget Company. We hire and build organizations, sourcing networks, financing networks, selling networks, executives to grow and maximize the value of portfolio investments, succession planning etc etc. it’s a business. It’s just that our business is not making widgets per se, but making portfolios of companies that make widgets. It’s the active vs passive aspect always overlooked by the demagogues.

    And I again have to make this point. Can anyone tell me how the little guy isn’t served by the fact that his/her teacher/police/firefighter/&union/college endowment fund gets excellent returns? This public debate is crazy. An abortion. Envy driven. Politically driven. But most assuredly not economically driven.

  26. WR says:

    @PD Shaw: “In other words, Romney’s capital gain was the partner’s investment and if you start messing with the tax treatment of his capital gain, you may make the partners themselves uninterested in making the investment, or encourage them all to sell the business to a larger firm.”

    Oh noes! If Bain goes away, who will buy companies, strip all their assets, loot their pension plans and steal everything that’s not nailed down, then run away with millions while the employees are thrown out on the street with nothing? How can America survive without these paragons of capitalism?

  27. WR says:

    @Drew: “And I again have to make this point. Can anyone tell me how the little guy isn’t served by the fact that his/her teacher/police/firefighter/&union/college endowment fund gets excellent returns? ”

    Also a good argument for organized crime. Why don’t endowment funds deal heroin? After all, it would bring them a lot of money.

  28. Drew says:

    Why? Are they less likely to run funds and attempt profit, again, with other people’s money?

    Addendum. – Jp are you suggesting they have nothing at risk? hey have their own money at risk. And I defy you to take a similar position, Mr Critic with no skin in the game. Further, you’ve missed the whole argument. Just like a guy starting a widget company, PE guys have their entire future invested in the PE business they have organized, the people they have hired, and the illiquid investments (think 5-7 yrs) they have made. It’s a bet the farm situation.

    There are winners, at times big winners, and losers. But it’s not game for the faint of heart. You, with your 2 inch penis feel free to kibitz from the peanut gallery. But when you want to risk your financial lifestyle you let me know. We will pencil you in for this “easy money.”

  29. Drew says:

    Thank you for the insightful commentary, WR. The role of clowns I think is often underrated.

  30. @Drew:

    No, they operate it like owners. They are owners. Period. Again, if you want to see owners tax treatment of cap gains OI I think you should make that argument. good luck on the merits. Diversionary arguments are weak. And you really need to consider the consequences.

    Sheese, and you wanted to complain earlier that people don’t understand private equity? Fund managers don’t own anything. The fiduciaries are the owners, the fund manager is just the hired agent of those fiduciaries.

    Secondly, companies aren’t run by owners, they’re run by managers. Now for small companies the same person may be fullfilling both roles, but the PRIMARY innovation of modern corporate structure has been the separation of ownership (shareholders) and manamgement (executives).

  31. @Drew:

    You say a lot of interesting things about investment & etc., but I didn’t see direct justification for why people who do not invest, do not have money at risk, should enjoy a tax preference. That preference is what James calls “pure rent seeking” in the top article.

    Can anyone tell me how the little guy isn’t served by the fact that his/her teacher/police/firefighter/&union/college endowment fund gets excellent returns?

    Unless you lost track of what we are arguing … you are saying that your money manager, in his safe office, should be taxed at a lower rate than police or firefighters … because he’s so important to society!

  32. Rob in CT says:

    You, with your 2 inch penis

    Stay classy, Drew, stay classy.

  33. Rob in CT says:

    One point I’d like to make about this:

    a partner might have 20% of their net worth in risky, illiquid investments

    For the average joe, 20% of their net worth in extremely risky investments is, well, extremely risky.

    For a guy who already has a serious bankroll it’s just not the same level of risk. Sure, it would suck to lose 20% of your PWN no matter how rich you are. There is indeed risk. But this idea that these guys are such brave risk-takers in comparison to the rest of us – 2-inch penised schlubs that we are – is absurd. And Romney himself – the son of a CEO & governor, who sat out the Vietnam war “on a mission” in France, who was born on 3rd base? Do not EVEN try and tell us he’s some sort of brave risk-taker. He was good at what he did and raked in a quarter billion dollars doing it. Yay for him. But there’s no way he should be paying a lower tax rate than an ER doc earning six figures (for example). Wake up and smell the bullshit you’re shoveling.

    It’s almost as if you don’t understand the concept of marginal utility. Or don’t care to (more likely).

  34. Rob in CT says:

    And by the way, risk-taking – in and of itself – is not a justification for a tax preference. A tax preference is (or rather, should be only) given in order to encourage behavior that is helpful for our society at large.

    IRS.gov:

    Gambling winnings are fully taxable and must be reported on your tax return. Here are the top seven facts the Internal Revenue Service wants you to know about gambling winnings….

    Risk takers, taxed at normal rates! OMG!

  35. FWIW, I think the “risk” part of capital gains is a bit of a red herring. Losses do reduce tax, after all. We even allow capital loss carryover, in an attempt to smooth things out.

    The most immediate problem we have though is with people who don’t actually take capital risk, but get bundled with those who do, for tax purposes. That’s what James called “pure rent seeking” and what I most oppose.

    After that … I wouldn’t mind taxing all income equally. Though, the tricky bit with long term capital gains is inflation, too often taxed as income. You can own a house for 30 years, make no more than inflation gains, and then pay tax. Possibly a flat tax on income, with inflation adjustment for long holdings, would be the way to go.

  36. (Or more grippingly, we might all pay tax on interest income this year … income which is actually a loss after inflation.)

  37. Rob in CT says:

    FWIW, I think the “risk” part of capital gains is a bit of a red herring

    Ya think?

    And yes, I too have come to the conclusion that the answer is to tax capital gains as income, after an inflation adjustment. That really shouldn’t be that hard nowadays, what with these newfangled computers and all…

  38. @Rob in CT:

    Yeah, I used to back a step down for short/medium/long term investments, but someone here convinced me to just go with the inflation adjustment. Maybe it was you.

  39. I argued that it makes sense to treat true investment income differently than salary income, since the former carries risk and often accrues over years of deferred gratification.

    When someone starts a small business, is their income taxed at a lower rate for the first five years, or until the business starts to turn a profit?