WASHINGTON -- Mitt Romney saved about $$850,000 on his 2011 taxes, thanks to the Republican presidential candidate's controversial retirement package with Bain Capital that decreased his overall tax bill by a third.
According to the tax return released on Friday, Romney paid about $1.9 million in taxes on income of $13.7 million in 2011. Romney's income includes $6.8 million in capital gains, $3.6 million in dividends, $260,390 in directors fees, and $190,350 in speaking fees. He listed no income from wages, salaries or tips.
But much of Romney's capital gains income flowed from his retirement package at Bain Capital, the private equity giant he founded, which granted him an extremely lucrative and unconventional deal upon his departure. Although most former financiers must pay ordinary income taxes on retirement income, Bain allowed Romney to receive his payments as "carried interest" -- a special tax category reserved for those who actively manage investment funds.
Romney's 2011 return does not detail the amount of income he received in carried interest, but his campaign told HuffPost the amount is $5.5 million. When Romney released his 2010 tax return in January of this year, his campaign noted that the candidate reaped $7.4 million in carried interest income during 2010.
Carried interest income qualifies as a capital gain, making it eligible for a 15 percent tax rate -- far more favorable than the 35 percent rate that the wealthiest American taxpayers must pony up on ordinary income. Capital gains are one of the most lucrative tax breaks in the tax code for the rich -- 50 percent of all capital gains go to the wealthiest 0.1 percent of taxpayers, according to The Washington Post.
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Recording this $5.5 million as carried interest rather than ordinary income saved Romney $147,000 in self-employment taxes including Medicare and Social Security, plus additional savings of more than $700,000 in income taxes.
"He followed the law, and paid 100 percent of what he owes under the law," a Romney spokesman said.
While the special treatment the tax code affords to capital gains is a subject of heated debate among economists, carried interest is even more aggressively disputed. Under the carried interest scheme, fund managers receive a cut of an investment portfolio's gains as their compensation, rather than a simple cash fee for overseeing trades. Although advocates for this lucrative tax arrangement insist that it rewards investment companies for taking risks, managers may put little capital -- if any -- into the investment fund, making many experts question why managers should receive the same tax benefits as those who have actually put their own money at risk.
None of the arguments that apply to fund managers are relevant to Romney's retirement package, however. Romney has repeatedly stated that he is not playing any active role in Bain's current investment strategies.
"One of the justifications for the lower capital gains rate is that they encourage people to take risks," noted Rebecca Wilkins, senior counsel for federal tax policy at Citizens for Tax Justice. "But he only has the upside on these deals. If he walks away, he hasn't lost any money. Even if you buy the arguments about why there should be a lower capital gains rate, there's really no justification for this compensation being taxed as capital gains. This is just payment for their services. They haven't taken any risk, they haven't put up any capital."