Romney’s small tax bill could be a big problem

Introduction

Mitt Romney, who made millions buying and selling companies for a private equity firm, pays an effective tax rate that is lower than a family earning less than $70,000.

“It’s probably closer to the 15 percent rate than anything,” Romney told reporters in South Carolina Tuesday, when asked about his taxes.

The Bain Capital founder and current GOP presidential front-runner has been under pressure to release his tax returns. Romney is estimated to be worth as much as $264 million. If he had earned all that cash from salaried work, he would likely be in the top federal tax bracket of 35 percent.

But because private equity partners and hedge fund managers make most of their money from carried interest — a cut of profits off investments that are taxed at the lower 15 percent capital gains rate — the Romney household likely pays a lower overall tax rate than many middle class American families.

Not all of Romney’s earnings are taxed at the capital gains rate: The $374,328 in speaker’s fees that the former Massachusetts governor disclosed in his candidate financial disclosure filing will likely be taxed at the higher 35 percent rate when he files in April.

Romney told reporters Tuesday that the money he made from his paid appearances was “not very much,” a quote that has already found its way into an attack ad from American Bridge, a Democratic-aligned super PAC.

Even before admitting his low tax rate, Democratic groups had targeted Romney over the carried interest loophole. In October, the Democratic super PAC American Priorities renamed it the “Romney Rule” after an analysis from the advocacy group Citizens for Tax Justice estimated that Romney paid a rate of 14 percent.

Romney’s exact tax rate will remain a mystery until he makes public his federal income tax returns, a move most recent presidential candidates have voluntarily made.

Fellow GOP presidential hopeful Newt Gingrich has promised to release his taxes by Thursday, two days before the upcoming South Carolina primary. Romney will only release his in April after filing his 2011 returns, he said Tuesday.

Other venture capitalists have succeeded in paying even less than the 15 percent capital gains rate.

Todd Dagres, a former partner at private equity firm Battery Ventures, managed to use the carried interest loophole to avoid paying income tax altogether in 2003 despite earning $3.5 million that year. This loophole, which critics say allows the rich to get richer, has enraged Occupy Wall Street protesters, hundreds of whom converged on the Capitol Tuesday to protest the role of money in politics as the House returned from recess.

“My income comes overwhelmingly from investments made in the past,” Romeny added in the Tuesday press conference. He may have been referring to the lucrative retirement package he secured when he left Bain Capital, the private equity firm he helped found in 1984.

Romney left Bain in early 1999, but continued to collect profits on deals made by the firm through February 2009, the the New York Times reported in December.