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Obamas misleading tweet on Romneys taxes

By Glenn Kessler,
Susan Walsh/AP FACT: In 2010 and 2011, Romney paid less than 15% in taxes on $42.5 million in incomemuch less than what many middle-class families pay. Tweet by @BarackObama, July 3, 2012 We are avid readers of tweets by @BarackObama, though of course it is not the president himself but his campaign team that posts them. We are also very curious when politicians claim they have uttered a fact. So, is it really true that the presumptive Republican presidential nominee, who is very wealthy, pays a tax rate much less than manymiddle-class families? The Facts Romneyreleasedhis2010 tax return and an estimate of his 2011 return earlier this year. He earned a little more than $20 million each year, a good chunk of it in capital gains and dividends, which are taxed at a preferential rate as low as 15 percent. But thats not the only reason why Romneys tax rate is at that level. He also donates about 14 percent of his income to charity, which gives him a pretty big tax deduction. (As we have noted, President Obama in 2010 also gave about 14 percent of his income to charity.) Indeed, Romney gives about as much to charity $3 million as he pays in taxes. Those itemized deductions are counted against income that would ordinarily be taxed at a 35-percent rate. We figure that without those donations to charity, his effective tax rate would be at least 19 percent. (For more information, see the nifty interactive graphic by the nonpartisan Tax Policy Center showing how Romneys and Obamas tax returns match up against a typical middle-class family. You can see that Obamas itemized deductions also lowered his effective tax rate, compared to the rate for Vice President Biden, who had fewer deductions.) Nevertheless,theObamacampaigniscorrectthattheformerMassachusettsgovernorpaidabout15percentofhisgross adjusted income (thats line 37 on the tax return) in taxes. But is that much lessthan what many middle-class families pay? Firstofall,mostofRomneys taxes are federal income taxes. He pays relatively little in payroll taxes because the 6.2 percent Social Security tax maxes out once you earn a certain amount $110,100 in 2012. Romney in effect earns that much by Jan. 3. ButformostAmericans,payrolltaxesarethebiggesttaxitem.(Andthats not even including the share paid by employers. Most economists say employers pay for payroll taxes by cutting their employeeswages.) Peopleoftenconfusemarginaltaxrateswitheffectivetaxrates.Marginalratesarewhatyoupayoneachadditionaldollarof income, so that can be as high as 35 percent. The effective tax rate is the percentage of taxes you pay after deductions, adjustments and the like. TheCongressional Budget Office and Internal Revenue Service have produced estimates for effective tax rates, but the data are relatively old 2008 and 2009, respectively. Both also have limitations. The IRS data rely on information from actual returns, but thus miss people who dont file tax returns; the CBO tries to compensate by using estimates of income from untaxed sources and for people who dont file tax returns. There are also issues concerning what types of income to include in the definition.

To keep things simple, we are going to rely on a chart of effective federal tax rates produced by the Tax Policy Center. The chart shows the effective tax rate as a percentage of AGI, divided into quintiles, with the values based on a concept known as cash income. (Heres a definition.) Cash income is not quite the same as adjusted gross income, but Roberton Williams of the Tax Policy Center said the AGI numbers in the charts would provide the closest apples-to-apples comparison to Romneys tax return. Using the Tax Policy Center analysis, we will present the data two ways without and with the employer-paid share of payrolltaxes.Theincomefiguresarerounded.ThefirstmethodistheclosestequivalenttoRomneys tax return. Effective Tax Rates (taxes paid on tax return) Bottom 20 percent (0-$17,000):-5.8 percent Second 20 Percent ($17,000-$33,500):1.3percent Middle 20 percent ($33,500-59,500):9.2 percent Fourth 20 Percent ($59,000-$103,500): 12.9 percent Top20Percent($103,500+):20.6 percent Effective Tax Rates (also including payroll tax paid by employer) Bottom 20 percent (0-$17,000):1percent Second 20 Percent ($17,000-$33,500): 7.8 percent Middle 20 percent ($33,500-59,500): 15.5 percent Fourth 20 Percent ($59,000-$103,500): 18.7 percent Top20Percent($103,500+): 24.3 percent First,onecanseethatforalltherhetoricabouthightaxesintheUnitedStates,mostAmericanspayarelativelysmall percentage of their income in taxes. Second, Romney had an effective rate of 13.9 percent in 2010 and 15.4 percent in 2011, which gives him a higher rate than 80 percent of taxpayers in the first method and puts him just about in the middle of all taxpayers in the second method. No matter how you slice it, his tax rate is not significantly lower than the tax rate paid by middle-class Americans. TheObamacampaigncounteredouranalysisbypointingoutthatthetweetusedthephrasemany,not most,and by providing a dictionary definition showing that manymeans a large amount.The campaign also noted that a White House report showed that while the median tax rate for Americans with income between $50,000 and $100,000 is 13 percent, some 3 million face effective tax rates above 21 percent. Under the campaigns logic, this translates into Romney paying a rate much lessthan manyAmericans, though with the same data, one could say that many more pay a lower rate than Romney. It is not our job to determine whether that is a good or bad thing. The U.S. tax system is designed to be progressive, meaning the rich are generally expected to pay higher taxes than the less wealthy. Politically it may not be smart for Romney, with an annual income topping $20 million, to end up with a tax rate so similar to middle-class tax rates. But we are also reminded of Judge Learned Hards observation in 1935: Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury. There is not even a patriotic duty to increase ones taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.

ThePinocchioTest The Obama campaigns tweet relies on a very slippery fact. Romney, by receiving much of his income in capital gains and dividends and giving millions of dollars to charity, is certainly able to keep his effective tax rate relatively low, especially compared to a wealthy person who earns much of his or her income in salary. But, even so, Romney still pays an effective tax rate that is higher than the tax rate paid by most Americans. (About our rating scale) Check out our candidate Pinocchio Tracker Follow The Fact Checker on Twitter and friend us on Facebook . Track each presidential candidate's campaign ads The Washington Post Company