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Reporting On Romney's Taxes: Economics, History And Morality

Republican presidential hopeful Mitt Romney in Sparks, Nevada. Emmanuel Dunand/Getty Images hide caption

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Emmanuel Dunand/Getty Images

Republican presidential hopeful Mitt Romney in Sparks, Nevada.

Emmanuel Dunand/Getty Images

Is Mitt Romney being treated unfairly in the coverage of the taxes he pays?


Some might find it rich even to raise the question, but many NPR listeners have, and it is journalistically and intellectually a valid question.

According to tax returns that Romney released last week under pressure from opponents in the Republican presidential primaries, he paid what appears to be a low rate for 2010 of 13.9 percent in federal taxes on adjusted gross income of $21.7 million. His campaign also released his estimated income for 2011 and projected that the average rate over the two years would come to a slightly higher 14.5 percent. That is an uncertain number, however, and is still extraordinarily low by the standards of the nation's progressive income tax scheme. In that scheme, the wealthy supposedly pay the highest rates.

But many listeners wrote to complain that reports on Romney's tax returns by Tamara Keith on Morning Edition and All Things Considered were, if not biased against the wealthy, at least ill-informed and lacking the context that explains how he came to have the low rates. More than half of Romney's income comes from investments, which Congress purposefully taxes at a low rate. They do so on the grounds that this will encourage more investment, as well as compensate for what arguably is double taxation on some investment income. Keith's reports noted that most of Romney's income was taxed low because it came from investments, but some listeners and conservative advocacy groups felt that she and most of the mainstream media failed to explain the justification.

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They are a point. NPR is obligated to provide context and explanation, especially for subjects that are controversial or that might be unfamiliar to many in its audience, including the details of tax policy, for example. But it's also important that the context is itself fair and balanced; the explanation should not be skewed to one side of an argument. Full context requires additional historical, moral and economic analysis if any of this background is to be included in straight news stories and still be fair—that is to say, not be biased in favor of Romney's low tax rates.

Omitting the full analysis, in other words, and simply labeling the rate in news stories as "low" is fair even if it is not complete.

Elsewhere in its coverage, however, NPR did provide some of the context that letter-writers said was missing. It did so online, and, in anticipation of Romney's returns, All Things Considered did a two-way conversation between host Audie Cornish and NPR reporter John Ydistie on capital gains rates.

It was also fair to focus only on federal taxes, even though Romney surely paid state and local taxes, too, as some listeners noted. Those are lesser taxes and vary geographically, making it difficult to make comparisons nationally. Also, Romney didn't release his state and local tax information.

None of this is to suggest that Romney did anything illegal or questionable. No NPR stories made such a suggestion.

Lets work our way through the arguments. Listener Rick Walsh, of Boca Raton, FL, summed up many of the complaining emails in this very well-reasoned letter:

ATC's story on Jan 24th regarding Mitt Romney's tax return was very incomplete and misleading. The story utterly fails to note that any dividends upon which Romney pays 15% Federal tax have already been taxed at the Corporate level at 35%. In effect Romney is paying more net taxes due to this double taxation.

If you want to advance the agenda that the 15% double taxation of dividends is too low, then fine — but it is unfair, and frankly economically illiterate — to fail to report all the facts about how Corporate taxes and dividends work — and to point out fairly and accurately that the dividend payment has been taxed previously.

ATC should endeavor to provide a complete understanding of the issue, rather than the same breathless ignorance over the low rate (again, which is NOT a low net rate) that I hear and read all day long in the media.

Failing to do so, and joining the mass of ignorance not only misinforms on the facts, it builds bad faith in the government since it sounds like corruption — when in fact it is not unreasonable at all to have a 15% rate AFTER the 35% corporate tax has already been paid.

I don't want to make this a media bias issue, since the real issue is the evident economic illiteracy of the reporting staff, but I don't recall John Kerry's dividend income and effective tax rate being so closely scrutinized in 2004.

On one level, Walsh is correct. Of Romney's $21.7 million in reported 2010 income, $12.6 million was taxed at the capital gains rate, which is a maximum of 15 percent. Of this money, according to his campaign, $5.4 million—or roughly a quarter of his total income—was mostly in qualified dividends, stock sales and other gains from the profits of companies. The companies may have already paid taxes on these profits, reducing the after-tax profits to be distributed to investors and giving rise to the argument of double taxation. The maximum corporate tax rate is 35 percent.

Putting the two tax rates together, John Berlau and Trey Kovacs, of the conservative Competitive Enterprise Institute, estimated in an op-ed piece in The Wall Street Journal last week that the total effective tax rate on income from investing in corporations is as much as 44.75 percent. This compares to a top rate on salary income of 35 percent, which is applied to wages of more than $379,150. This suggests that Romney in fact could have paid a high effective tax rate.

But this context is itself incomplete. First, numerous studies over the years have shown that few companies pay the maximum 35 percent corporate rate. According to a recent study of 280 corporations by the non-partisan Citizens for Tax Justice and the Institute on Taxation and Economic Policy—both of whom advocate for middle- and low-income tax payers and tax transparency—the three-year effective tax rate of the group averaged 17.3 percent. Some large corporations manage some years to pay no corporate taxes at all.

The second issue has to do with the concept of double taxation itself — a concept that is highly disputed. For example, almost all of us who earn salaries are hit by double taxation. Our employers match our payroll taxes. Most economists agree that this "employer half" is effectively subtracted by companies from the wages they pay us, in effectively the same way that corporate taxes are subtracted from the profits distributed to investors. Additionally, it is not clear that corporate tax costs are passed on to investors anyway, and might instead be paid by employees (through reduced wages) and by consumers (through higher prices).

This debate over corporate tax "incidence" has divided economists for years and will surely do so for years more. This suggests that there is nothing conceptually special, galling or even agreed-upon about double taxation paid by corporate investors.

Almost all of Romney's investments in companies, moreover, were not directly in the companies themselves but in funds. It is the funds that are the direct investors in the companies. A "pass-through" concept links the fund investors and the companies, but this concept becomes ever more tenuous in the modern financial world of hedge funds and derivatives.

In Romney's particular tax case, there is more still to consider. Much more. Until now, we have been exploring the quarter of his income that is indisputably capital gains. Another nearly 30 percent of his income—$7.4 million—was in so-called "carried interest," according to Romney campaign chief counsel Benjamin Ginsberg in a conference call with reporters. Carried interest is taxed like a capital gain but is a very different type of income altogether. It has almost no ties to corporate profits and thus is not subject to a double-taxation claim.

Almost all this income continues to come from Romney's past interest in Bain Capital, a private equity firm he founded. Carried interest is considered by many economists to be conceptually more like a commission because it is earned by private equity managers from the investments made by their firm even if they don't invest their own money. Additionally, a core strategy of private equity firms is to borrow against the target company in which they are investing precisely so that the interest on the loans reduces corporate taxes to as low as zero. Perversely, in other words, instead of there being a double taxation claim, it can be argued that firms such as Bain borrow, take risks and grow at the expense of other taxpayers.

None of this is secret. Congress repeatedly has made a value judgment in devising the tax structure and rates that have benefited Romney. Congress—both parties, at different times—voted to benefit investors and financiers with lower tax rates for investments than those paid on wages on the grounds that this would help stimulate more investment and, in turn, the economy.

Romney benefited from a host of other deductions, such as for charitable giving, and legal maneuvers, such as in the establishing of trusts and offshore investments. Because of these deductions, his total real income was surely much more than the reported $21.7 million in "adjusted gross income."

You must decide for yourself whether you agree with the policy rationale for taxation on business investments and if it should apply in all the ways it does now. President Barack Obama and many Democrats have proposed reversing the benefit for carried interest. Newt Gingrich goes in the other direction and proposes doing away with the capital gains tax. Romney himself has proposed keeping it at current levels for high earners, but eliminating taxes on dividends and capital gains for households that earn less than $200,00 a year.

Capital gains tax is long enshrined. Until 1921, the rate was equal to that on wages, according to Roberton Williams, senior fellow at the authoritative and non-partisan Tax Policy Center. The argument that a high capital gains tax was counter-productive prevailed after the war, and it was cut to as low as 13 percent, he said. Beginning with the Great Depression it mostly fluctuated, though during four years under Ronald Reagan in the 1980s, wages and capital gains were again taxed the same—28 percent. The current rate was passed by Congress in 2003.

This history suggests that the current rates and structures are not engraved in stone, or even proven in their effectiveness. Economists are divided on what is the optimal rate that encourages investments, jobs and economic growth, plus maximizes tax income.

Then there is the moral argument. If tax levels are not seen by most Americans as fair, they lose their legitimacy, which is an existential threat to the nation itself. A democracy is held together by more than its rules. People must believe in the tax structure, and its fairness for all.

Enter the so-called Buffett Rule proposed by President Obama. The rule would impose a minimum tax rate of 30 percent on the highest income earners in the United States, no matter how the money is earned. The rule is named after legendary Warren Buffett who has complained that he paid a lower tax rate than his secretary.

You will decide for yourself what is moral and fair, and what you think the collective ethos of the nation is. My concern and that of NPR is what is fair in the reporting on Romney and the broader tax issues. Should stories be framed in the context of progressive total tax payments, of economic stimulus, of double taxation, of finance loopholes, of the lesser value of work, of the historical fluctuations or the division among economists? All these questions reflect elements of truth and are legitimate.

But one thing is clear to me. To frame a news story or analysis only in the context of double taxation would be incomplete and misleading. The rate Romney paid is what it is. The justifications are a separate argument best left to a separate story that explores these many angles.

I end with Shirish Date, the lead editor on Romney's tax coverage. I asked him to explain the editorial decisions until now. He wrote:

What we wanted to show in these pieces was how much income Romney had, and how much he paid in taxes, against the yardsticks of his top GOP primary opponent and the typical American taxpayer. These are political measures, which are appropriate for political stories such as these.

True, there are a number of related discussions that we didn't enter into. Maybe these are good places to explore in the coming weeks.

Back to you.

Stephannie Stokes contributed to this post.

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