What does “effective tax rate” mean (Mr. Romney)?
The big news is that Mitt Romney will release his 2011 return, and also a “summary” report of the “effective tax rates” he’s paid every year dating back to 1990.
The Romney camp is already claiming that he paid an average “effective tax rate” of 20.2% over that period, and never paid an “effective tax rate” lower than 13% during any of those years.
The reason I keep putting the phrase “effective tax rate” in quotation marks is because the Romney camp keeps using that phrase — and all the news reports I’ve seen on this so far keep dutifully repeating that phrase. But nobody (including the journalists) is explaining what “effective tax rate” actually means. So I’ve been digging around on Google, and came up with the following definition:
The effective tax rate is the average rate at which an individual is taxed on earned income, or the average rate at which a corporation is taxed on pre-tax profits. The formulas for effective tax rate are as follows:
Individual: Total Tax Expense / Taxable Income
Corporation: Total Tax Expense / Earnings Before Taxes
(Source: Investinganswers.com)
This appears to be pretty consistent with other definitions I’ve found. There are two notable things here: 1) If your tax rate changed over time, the “effective” rate basically comes up with an average over that period. 2) For an individual, the formula uses only “taxable income” in the calculation.
The second point is the one that really catches my eye, because “taxable income” is defined elsewhere as follows (bold emphasis mine):
“The amount of income that is used to calculate an individual’s or a company’s income tax due. Taxable income is generally described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments that are allowable in that tax year.” (Source: Investopedia.com)
SO … are these “effective tax rates” the Romney camp is touting — which supposedly averaged 20% and was never fell below 13% — ones that don’t use deductions and exemptions in the income calculation? Because, if so, that means Romney could well have (and probably did) pay a far lower percentage of his real income in taxes during those years, if you included deductions and exemptions.
So, as this story unfolds, it would be really helpful to see some responsible journalists do the following: 1. Push the Romney camp to define what they mean by the term “effective tax rate” in their claims. 2. Dig to find out if he’s excluding any exemptions or deductions in those calculations.
Let’s get on this, journalists! I’m counting on you!
