Mitt Romney's Sweetest Tax Break: The Dirty Little Secret of Carried Interest

Mitt Romney"Oh, I'm sure people will talk about it," GOP presidential hopeful Mitt Romney told a Florida audience Monday night, on the eve of the much-ballyhooed release of his tax returns. "But -- but I pay all the taxes that are legally required and not a dollar more."

And as Romney's returns showed, that was absolutely the truth -- the former Massachusetts governor pays all the taxes that are legally required ... and not a dollar more. The surprise for many voters, however, will not be not that Romney's taxes are in order, but just how small a percentage of his income goes to Washington.

According to his returns, Romney made $21.6 million in 2010, and paid a little over $3 million in taxes. This works out to 13.9% of his income. By comparison, the average U.S. household making $79,000 pays an effective income tax rate (income tax minus deductions) of 14.4%. In other words, Romney's 2010 tax percentage was lower than that of a family making 0.3% of his income.

How did Romney manage to pay taxes at such a low rate? The "secret formula" isn't so secret: It's just out of reach for most Americans. Romney's money came from investments, not wages. Under the current tax code, anyone with a salary of $379,150 or more per year pays taxes on it a 35% tax rate. However, people who derive their income from stock dividends, capital gains or carried interest only pay 15%. Those three categories account for the vast majority of Romney's income.

There's a case to be made for taxing capital gains and dividends at lower rates. It goes something like this: Invested money was taxed when it was first earned, and corporations pay taxes on their profits. From this perspective, taxing dividends and capital gains is like taxing the same money a third time.

Other pundits and tax critics claim that investment tax breaks are good for the economy, as they encourage people to keep money in the market, where it helps fund startups, business expansion, and other economically worthwhile endeavors.

It's Not What You Think

Mitt RomneyBut a big chunk of Romney's income doesn't come from stocks that he personally holds. In 2010, he made $7.4 million from carried interest.

You haven't heard of carried interest? Basically, it's a share of investment income that goes to the private equity manager who oversaw the investment. Romney's carried interest income doesn't come from dividends on stock he owns, nor from the sale of stock that he once owned. The money wasn't generated from income that he had already paid tax on. Think of it as being sort of like a tip skimmed off the top of all the money that his company makes for its investors.

But unlike tips for a waitress or cabbie, which are taxed at the same rate as wages, Romney's carried interest income is taxed at the same 15% rate as other investments. The discounted carried interest tax rate -- which is moderately controversial, but would be probably be seriously controversial if more people understood it -- has come under heavy attack in recent years, but is still in effect.

A few moments after announcing the release of his tax returns, Romney told his audience that "I'd like to see our tax rate come down." His leading Republican opponent, Newt Gingrich, agreed, noting that "I'd like to bring everybody else down to Mitt's rate, not try to bring him up to some other rate." He went on to announce that, if he were in the White House, the tax rate on capital gains would be zero.

It only took a second for Romney to understand the implications of Gingrich's tax proposal: "Under that plan, I'd have paid no taxes in the last two years!"

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at, or follow him on Twitter at @bruce1971.

Increase your money and finance knowledge from home

Advice for Recent College Grads

Prepare yourself for the "real world".

View Course »

Introduction to Preferred Shares

Learn the difference between preferred and common shares.

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:
Jordan Wallick

People like this are why the country is broke and spiraling into depression. Greedy ****.

June 09 2012 at 4:26 PM Report abuse rate up rate down Reply

He already paid taxes on that money

January 27 2012 at 7:35 PM Report abuse +1 rate up rate down Reply

Income is income and should be taxed at the same rate no matter what its source. Investments are not taxed twice. Only the income from the investment is taxed.
To say that dividends are taxed twice has merit but you are forgetting the reason corporations exist. Corporation were recognized as a legitimate legal entity to limit the exposure of the owners. With corporations, no longer could owners' personal property be exposed to lawsuits or bankruptcies as they would have been if the entity were a partnership. For this "limited liability" the owners could only lose the investment dollars and not all of their wordly posessions. The price for this was a tax on money taken out of the corporation as oposed to reinvestment in the corporation.
Carried interest is even more of a boondogle than capital gains. I'll let someone else explain the complete absurdity of that loophole.

January 27 2012 at 1:45 PM Report abuse rate up rate down Reply

Plenty of ordinary people take advantage of this "dirty little secret". IT IS PERFECTLY LEGAL.

January 26 2012 at 8:41 PM Report abuse +1 rate up rate down Reply

BRUCE WATSON your comments on Carried interest are phenomenal. No wonder the average person never
realizes this about the accummulated wealth of our persons in our government. More of this explained to that
the average dundder head will realize how we have no inkling as to this important info that you gave to us.
Keep it up

January 26 2012 at 2:34 PM Report abuse -1 rate up rate down Reply
1 reply to anniec18ma's comment

Just looney lilb propoganda, annie.

January 26 2012 at 8:41 PM Report abuse +1 rate up rate down Reply

A little Fact Married filling Jointley on a Gross of $100,000 $25,000 of deductions, agjusted income of $75,000, Taxes due $9,500 plus 25% of excess over $69,000 25% of $5,500 = $1375.00 + $9,500 =$10,875 IRS Tax or a total rate of 10.875% even though in the 25% bracket, Evewn the standard Deduction would be 12% totalOr a retired couple on SS and other pension making $90000 / year thie tax would be abou $1500.00 This is figured on Max SS of $55,000 and pension of $35000 - Standard Ded of $21000.00 ( 65+ ) age. If more people did thier income tax the public would not be so uninfirmed

January 26 2012 at 1:44 PM Report abuse rate up rate down Reply

Look some might not like it but at least it is legal and in the tax code also Romney has a team of accountants that take care of his financial program he doesnt do it himself.....too bad Geither wasnt smart enough and used an off-the shelf tax program to do his (or so he testified). I am not particularly a supporter of Romney for Pres. but I definitely do not want to have someone who doesnt know how to handle money in charge of the government....we have that now and it is a disaster!

January 26 2012 at 12:25 PM Report abuse rate up rate down Reply

Liberals don't realy want to take your money and give it to someone else to make the someone else richer. They want to buy the someone elses votes to win an election. If the liberals could find a way to win an election by giving you nothing or providing less they would. But because there agenda is so bad, they use money as the lichpin and enslave people in NEVER ENDING POVERTY. Lyndon Johnson who started this garbage knew they he needed a way for his party to win year after year, the Republicans were to scared to take away the free benefits as they though they would lose elections. That is why this mess exist and will never get better. The current crop of politicans are so bad and scared of the lefties in the White House, they talk in circles and hide. Listen to Romney, pure milk toast. Newt was very forceful in the last debate and articulated the problem so even welfare people understood it.

January 26 2012 at 11:35 AM Report abuse rate up rate down Reply

He is doing nothing illegal--his tax rate is similar to others in the same financial position--I really don't understand all the noise. He is rich--pays his taxes as required and happens to be very generous.

Take a look at John Kerry's return--I beleive his rate is about 13%--Nancy Pelosi--or any other antique we have in the House or the Senate--hell even Obama paid only 25% on income of $1.8M.

Flat rate seems to me to be a no brainer.

January 26 2012 at 11:23 AM Report abuse +1 rate up rate down Reply
larry & gail

If you think people pay tax on Tips your in another world, Most tips are never reported as result in a tax rate of 0.000%

January 26 2012 at 11:16 AM Report abuse rate up rate down Reply