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A Project of The Annenberg Public Policy Center

Does Romney Pay a Lower Rate in Taxes Than You?

A new ad from the Obama campaign claims that Mitt Romney “paid only 14 percent in taxes—probably less than you.” That depends. Romney paid a federal income tax rate that is higher than the income tax rate paid by 97 percent of tax filers. But if you include a combination of income taxes and payroll taxes — which make up the bulk of federal taxes for most taxpayers — the ad is accurate.

The ad, called “Stretch,” is the first to feature a report from the Tax Policy Center that concluded a plan like Romney’s proposal for across-the-board tax cuts, together with the goal of remaining revenue neutral, would ultimately raise taxes on people making less than $200,000 a year. The ad contrasts those findings with data from Romney’s 2010 tax return.

The ad begins with a narrator stating, “You work hard, stretch every penny, but chances are you pay a higher tax rate than him: Mitt Romney made $20 million dollars in 2010, but paid only 14 percent in taxes—probably less than you.”

According to Romney’s 2010 tax return, he had an adjusted gross income of about $21.7 million in 2010 and paid about $3 million in taxes. That comes to an effective tax rate of 13.9 percent. That’s considerably less than the amount paid by most people with that high of an income, but in Romney’s case most of his income comes from dividends and capital gains — which are taxed at 15 percent rather than the highest marginal rate of 35 percent. Romney dipped below the 15 percent threshold because he donated about 14 percent of his income to charity.

The question, though, is whether Romney paying 14 percent is “probably less than you.”

It’s not if you look strictly at the income tax paid to the IRS. Scott Hodge, president of the business-backed Tax Foundation, released a report based on 2009 IRS tax data that found 97 percent of American tax filers paid a lower rate of income tax than Romney did. The bottom 40 percent of tax filers pay no income tax at all, or receive a refund, Hodge told us in a phone interview, and so “by definition, those people are paying less than Mitt Romney.” On average, Hodge said, people making between $100,000 and $200,000 paid about 12 percent in federal income taxes. That’s less than Romney’s 13.9 percent, and people making less than $200,000 represent more than 97 percent of all tax filers.

“Clearly the vast majority pay less than Romney,” Hodge said.

But there’s another way to look at this, and that is to include payroll taxes, those often unnoticed taxes that are usually withheld from an employee’s paycheck to pay for such things as Social Security, Medicare and unemployment insurance. The employer also pays payroll taxes for each employee, money that arguably would go to an employee if the company didn’t have to pay it. Together, those payroll taxes actually account for the lion’s share of federal taxes most people pay.

In February, the nonpartisan Tax Policy Center released an analysis that found that when you include income tax and payroll taxes paid both by the employee and employer, people in the middle 20 percent paid an effective rate of 15.5 percent. That’s a higher percentage than Romney (who paid no payroll taxes because he declared no wages or salary in 2010). So the ad’s claim is certainly defensible.

There are all sorts of ways to slice tax data. According to the administration’s Economic Report of the President, the median effective tax rate for the middle 20 percent of U.S. taxpayers in 2012 is 13.3 percent when you include income, payroll and corporate taxes (Table 3-1). That also puts the ad’s claim in the right ballpark. But in order to get there, you have to compare Romney’s income tax only to the rates others pay in combined income, payroll and corporate taxes.

“Bottom line,” said Eric Toder co-director of the Urban-Brookings Tax Policy Center, “if you look at income taxes only, Obama’s statement is not true for most Americans. If you add in payroll taxes, however, it is probably true for lots of people.”

No matter how you slice it, Toder said, Romney’s tax rate is very low for someone with his level of income. The average income tax rate for the top 0.1 percent (which is where Romney falls) is 23.6 percent.

— Robert Farley