In 2011 Republican presidential nominee Mitt Romney paid an effective tax rate of 14.1 percent, up slightly from 13.9 percent in 2010. But is this rate high or low?
Compared with a lot of other Americans (including the famous 47 percent who pay no income tax), it's pretty high. But compared with other high-income individuals, it's fairly low. Depending on which peer group you think is more relevant, you can reach vastly different conclusions about whether Romney is paying his "fair share."
But how does Romney stack up in a peer group he wants desperately to join: American presidents? Compared with other Oval Office occupants, Romney's tax rate is quite low. The lowest, in fact, since Richard Nixon, who started the modern tradition of presidential tax disclosure when he got into hot water over those same low rates.
There are many different ways to calculate effective tax rates, but for the sake of comparative simplicity, let's use the method adopted by Romney himself: total taxes owed divided by adjusted gross income.
Using that method, Romney's tax team has determined that the candidate paid an average tax of 20.2 percent over the past two decades. That's considerably more, however, than Romney has paid over the past two years, which are the only years for which he has released actual returns.
Since we'll be calculating rates for former presidents using numbers from the actual returns they filed while in office -- with the exception of Ford, who didn't release returns but did provide detailed information about his income, deductions, and payments -- we'll use numbers from Romney's released returns, too. (Most of the figures used for this article are based on presidential returns reprinted by Tax Analysts' Tax History Project, available at http://www.taxhistory.org. Some of the earlier returns are virtually illegible, though, so in those cases contemporary press reports were used to supplement the data.)
So applying the Romney method to his actual returns, we get an average rate of 14.02 percent in 2010 and 2011. As many commentators have noted, that's a lot lower than President Obama's average effective tax rate of 26.45 percent during his presidency. (It's also lower than the average rate Obama paid in the same two years covered by the Romney release: 23.4 percent.)
But Romney's rate isn't low just by comparison with our current president. It's also low compared with every president of the last 40 years.
Among presidents, Bill Clinton and George H.W. Bush would be President Romney's closest taxpaying peers, with average rates of 20.15 percent and 19.86 percent, respectively.
Those rates are a lot higher than Romney's, but other presidents have been higher still. George W. Bush, whose signature tax cuts still dominate fiscal debate in Washington, paid at a rate of 27.17 percent. His fellow tax cutter, Ronald Reagan, paid 32.37 percent.
The president with the highest rate? Gerald Ford, at 37.82 percent. Ouch.
There are several reasons why average rates vary so dramatically among presidents. A big part of the story is tax reform and tax reduction. Over the decades, rates have generally declined, and presidents -- like many of their fellow Americans -- have benefited from that trend.
In theory, tax reform has also involved the elimination of tax preferences, which should theoretically keep average rates up (since presidential taxpayers wouldn't be able to shelter as much of their income from the tax man). But the rate-raising effect of loophole elimination has been offset for several presidents by the persistence of a particularly important tax preference: the special low rate applied to capital gains (and some dividends).
Mitt Romney's rate is so low principally because he gets a big chunk of his income from capital gains: something on the order of 65 percent to 75 percent. By contrast, most American presidents have relied much more heavily on various forms of "regular" income that don't get the rate preference accorded to capital gains.
If he wins his race for the White House -- and continues to file tax returns that look like the ones released during the campaign -- President Romney will have only Richard Nixon to keep him company at the bottom of the rate roster. Generally speaking, Nixon is not a happy point of comparison for presidents, and this is true for taxes as well as break-ins and cover-ups.
Nixon's rate was low thanks to his extremely aggressive efforts at keeping it low. In particular, he took a very large charitable deduction for the donation of his official papers to the National Archives. (He accumulated most of these papers during his eight years as Dwight Eisenhower's vice president.)
At the time, such donations and associated deductions were not uncommon. But Nixon managed to get a very high valuation placed on his papers. That gave him a nice large deduction, which he used to offset his income for several years. In 1970 and 1971, for instance, the deduction almost completely wiped out his tax liability. His tax rate in those years was just 0.3 percent.
Eventually, word of Nixon's tax avoidance leaked out, and both Congress and the IRS investigated. In 1974 the president was forced to pay $465,000 in back taxes and interest, and some observers muttered darkly about the possibility of fraud charges. But the Watergate scandal soon took center stage, replacing tax avoidance as Nixon's most serious political problem.
No one has accused Romney of anything like Nixon's aggressive tax avoidance. But Nixon's experience is still a cautionary tale. Right or wrong, Americans care a lot about the taxes paid by their presidents. And given the way we started down this path of presidential tax disclosure, Americans might be forgiven if they want to pry a little.
Average Effective Tax Rates, Romney 2010-2011, Presidents While in
Source: Presidential tax returns available at http://www.taxhistory.org, and contemporary press reports.