01/24/2012 03:51 pm ET Updated Mar 25, 2012

Reading Romney's Taxes: The Rich Really Are Different From You And Me

If you've ever heard that the rich are different from everybody else, but wondered just what that looks like, the Romneys' tax returns are a good place to start. Here are a few ways:

They're richer: Let's face it. $21.6 million is a lot of income.

They get the advantage of favorable tax treatment: The Romneys managed about $4.5 million in deductions, and paid tax at an effective rate of 13.9% in 2010.

Their lives are really complicated: Their 2010 Form 1040, with all its schedules and attachments, is over 200 pages long. And that doesn't even count the returns from their trusts or their foundation.

They get big-name help: PriceWaterhouseCoopers prepared those 200 pages, the trustee of their trusts is from Ropes & Gray, the whitest of white-shoe Boston law firms, and Goldman Sachs manages a bunch of their money.

They don't always hire the most expensive help, though: The Romneys reported paying household employment taxes of $4,119 on wages of $20,603 that they paid to four household employees in 2010.

They use all kinds of mechanisms to reduce taxes. For example, what are their deductions? Well, about $1.5 million was cash they gave to the Mormon Church, and another similar amount was stock (mostly Dominos Pizza, one of Bain Capital's big hits), which they gave to the Tyler Foundation, their charitable foundation. Now, even the merely affluent reduce their taxes by giving away low-basis stock rather than cash, but the Tyler Foundation took in those donations, and made grants of only around $675,000 in 2010. The recipients were the Mormon Church and a typical Boston list including the Dana Farber Cancer Institute and Harvard Business School. I guess they're keeping their powder dry.

They have a funny idea of what "isn't very much." Gov. Romney has acknowledged that he had some ordinary income from speaking fees, but he said it "wasn't very much." Turns out that in 2010 he netted $480,115 from speaking fees (and that's after he paid his booking agent) and $113,881 from director's fees. Pocket change, I guess. Of course, since their charitable contributions were greater than that, they didn't pay taxes at ordinary income rates on any of it.

They LOVE Europe. Or at least, they like to invest there. Yes, while Gov. Romney has attacked President Obama by suggesting that wants to turn the US into Europe, the Romneys have investments in a whole raft of offshore vehicles in Europe -- places like Germany, Ireland, Luxembourg (which appears to be where the Bain Capital millions are stashed), and, of course, Switzerland. And that's before we get to Australia, Bermuda, and the Cayman Islands. Of course, not all those investments are actually foreign holdings. One of the Irish funds is the Goldman Sachs US Dollar Liquid Reserves Fund -- essentially a money market fund, but held, probably for tax reasons, in Ireland.

They invest in hedge funds. This actually surprised me, since Gov. Romney was on the receiving end of private investment fund fees for long enough to know better than to pay them. Maybe he just liked the names, like Barracuda Investments Ltd and Ursa Funding (a fund called Ursa is most likely a short-seller, since short-selling is inherently bearish). The names suggest a range of investments, including short-selling, vulture investing, junk bonds, and foreign currency trading.

The Romneys' tax returns certainly don't look like most people's. Where most of us have jobs, or businesses, the Romneys have investments and long trailers on a former life. And, of course, since by long tradition we tax capital more gently than labor, and give capital scope to move around the world to try to reduce taxes further, the Romneys end up taxed at a risibly low rate. Nice work if you can get it.

Jonathan Tiemann, a former finance professor at Harvard Business School, is currently President of Tiemann Investment Strategies in Menlo Park, California.