(Reuters) - Does Mitt Romney pay a lower effective federal income tax rate than a lot of Americans who, unlike him, work for a paycheck?
The short answer: yes.
But the fabulously wealthy Republican presidential candidate almost certainly pays a higher effective rate than most Americans, almost half of whom pay no federal income tax at all.
That’s what studies from a range of think tanks show in the wake of a furor over Romney’s taxes sparked by his answer to a reporter’s question on the campaign trail in South Carolina.
The debate that has ensued gets at some common misperceptions many Americans have about the tax system, as well as basic decisions made by the U.S. government in recent decades about favoring investment income over wage income.
Here are some key points to consider.
* Here is the quote: “What’s the effective rate I’ve been paying? Well, it’s probably closer to the 15 percent rate than anything. Because my, the last 10 years, my income comes overwhelmingly from investments made in the past rather than ordinary income or rather than earned, annual income. I get a little bit of income from my book, but I gave that all away. And then I get speaker’s fees from time to time, but not very much.”
WHAT IS AN ‘EFFECTIVE TAX RATE?’
* The first part of Romney’s remark centers on “effective tax rate.” By this he probably means the tax rate he actually pays each year to the federal government after deductions, credits, offsets and the like.
The effective tax rate is not the same as a tax bracket.
For 2011, six progressively higher tax rate brackets apply to each taxpayer’s income: 10 percent from zero to $8,500; 15 percent from $8,500 to $34,500; 25 percent from $34,500 to $83,600; 28 percent from $83,600 to $174,400; 33 percent from $174,400 to $379,150; and 35 percent above $379,150.
The effective tax rate is the blended rate actually paid, and after adjusting for deductions and offsets, divided by total income.
* Effective tax rates vary wildly from one income group to the next because of the tax code’s complexity.
For 2011, about 46 percent of Americans will pay no federal individual income tax, about half of them because they are poor, according to the Tax Policy Center, a centrist think tank.
The Tax Foundation, a business-focused think tank, also based in Washington, D.C., said in a report on Wednesday:
“For the entire universe of American taxpayers, the average tax rate is 11 percent” of adjusted gross income.
“The highest average tax rate paid by anyone earning under $100,000 is 8 percent. That shows the power of the sundry tax credits available to the ‘middle-class,'” the foundation said.
Millionaires pay a lot of the U.S. government’s total tax take, but at the same time, the foundation said, there were 1,470 millionaires in 2009 who had no tax liability.
The vast majority of high-income households pay an effective rate well below the 35 percent top bracket. One quarter of households in the top-earning 1 percent pay less than 11 percent in individual income tax, while three-quarters pay less than 25 percent, the center found.
* The second part of Romney’s remark has to do with the 15-percent long-term capital gains tax. This is the rate he - and everyone else who profits in the stock market - pays on income from investments held for more than a year.
This rate has been at 15 percent ever since deep tax cuts made under President George W. Bush in 2003.
Unlike most Americans who earn a paycheck, Romney gets most of his income from investments in the form of capital gains, dividends and interest. So, as he says, his effective rate is probably close to the 15-percent investment income tax rate.
That rate is lower than the top wage income brackets because the U.S. government over the past 30 years or so has deliberately favored investment income over wage income.
Looking at effective rates, the capital gains rate is in the middle -- lower than the effective rate paid by many well-to-do people, higher than the effective rate paid by most Americans.
* Few individual income taxpayers report taxable capital gains: in 2009, a terrible year in the market, only 1 in 20 did; in 2006, a more typical year, it was 1 in 7, the center said.
Most capital gains claims are made by very high income taxpayers, like Romney. In 2006, the top 0.3 percent of taxpayers with income exceeding $1 million reported 61 percent of all capital gains.
The capital gains rate will rise to 20 percent in 2013 if the Bush tax cuts are allowed to expire - a prospect sure to result in a major political struggle later this year.
Before Bush, a Republican, the capital gains rate was cut to 21 percent from 28 percent by Democratic President Bill Clinton.
The 28-percent level was established under the landmark 1986 tax reform of Republican President Ronald Reagan.
HOW DO ROMNEY‘S BAIN TIES FIT IN?
* Romney - who made his fortune at private equity firm Bain Capital - may also benefit from the “carried interest” tax break. This lets private equity and hedge fund managers treat a large part of their annual earnings as capital gains, rather than ordinary wage income. Some Democrats calls this a loophole and want to eliminate it.
* In addition, Romney has much of his fortune tied up in Bain funds and ventures based in tax-haven countries such as Bermuda, Ireland and the Cayman Islands.
The exact details behind Romney’s taxes will only be known if and when he releases his tax returns. He has said he plans to do that in April, but he is under pressure to do it sooner.
Additional reporting by Kim Dixon; Editing by Howard Goller and Cynthia Osterman