That’s a great question, and there is no easy answer. This may clarify it a little:
As individual taxpayers Romney and Buffet pay so little in taxes because of two sources of income:
- They take qualified dividends from their corporations that they own or are investors in.
- They take Capital Gains distributions from investments they have created
For qualified dividends, between 2001 and 2012 they were taxed at 15% (now its 20%), regardless of what tax bracket you were in. Although it seems like a relatively small amount of tax, before any shareholder is able to receive and pay tax on those dividends, the corporation had to pay a tax on that as well (somewhere in the ballpark of 35-40% usually). This is where double taxation occurs. If the company is a foreign company, lets use the Netherlands as an example, they only charge 3-4% taxes on that income, then it gets distributed to Mr Buffet, and he only pays 15%. Heck of a deal.
For capital gains, the maximum rate from 2001-2012 was 15% (now its 23.8%). For investments in a “small business” (a company that has less than 50 million in assets), sale of any stock provides a tax deduction of 50% of that sale, this means that sale is now only taxed at 7.5%… wow. This is why there are so many venture capital firms.
In addition to this, they can also take advantage of investments made in countries with favorable tax laws. Both store a good chunk of their money in overseas, tax favorable bank accounts and investments. Though a slipperly slope for US tax law, many ultra rich investors have many advisors that make it legal. To explain fully would require a whole other blog post.
So as you can see, using those two methods, Buffet and Romney were able to keep their upper tax limit to around 15%, then using deductions, like donations, property taxes, etc, they dropped their tax rates to around 11-12%.
That is only for their individual rates, below is how they win with their corporations:
Huge corporations use a combination of tactics to keep tax low, but the latest and greatest is setting up shop overseas in a “tax haven” country. For example, Ireland made a deal with apple so that they would only charge 3% in taxes on ALL of their worldwide appstore sales. That’s almost a billion dollars in sales a year that they only pay 3% tax on. In comparison, the US would charge 35%.
The research and development credit allows for a very good option too. An example of the extraordinary benefits of the R&S Credit includes the fact that Boeing reported a $20 billion dollar pre-tax income, yet they received a refund from the government of $110 million. Also the new Domestic Production Activity deduction allows a very large deductions as well, most US based companies can access that.
I’ve researched this stuff a lot, mainly because I want to be in the business of offering these options to small businesses and startups, as well as people who may not be as wealthy as Mitt Romney.
