Fox News host Neil Cavuto and his guest hyped Mitt Romney's claim that he “paid [a] 20 percent effective tax rate” based on the release of some of his tax information last week. But the rate released by Romney is a misleading calculation which tax experts have noted can “distort the rate you've paid.”
On Your World, host Neil Cavuto and Townhall.com political editor Guy Benson promoted the summary released by the Romney campaign claiming that Romney has paid an average effective tax rate of 20.2 percent over the past 20 years. Benson claimed Romney's tax summary “totally blows up a bunch of Obama ads that said, 'Look, Mitt Romney pays lower tax rates than you do.' Actually, the effective tax rate he's been paying over the last 20 years is almost double that.”
But Benson and Cavuto failed to note that the rate released by Romney is a simple average -- or the average of all the tax rates he has paid over that 20-year period -- and not a weighted average, which calculates the rate based on the total amount he paid and his total income over that time.
The distinction is significant, as the simple average released by Romney can be misleading. Following the release, The Washington Post's Greg Sargent pointed out that the way the Romney campaign calculated the tax rate “obscures the fact that income may have fluctuated quite markedly from year to year.” Sargent quoted Tax Policy Center senior fellow Roberton Williams, who explained why the simple average is misleading:
“Let's say you have 10 years in which you paid 13 percent in taxes, and 10 years in which you paid 27 percent,” Williams told me. "If you average those rates, you'll get an overall rate of 20 percent. But if the 13 percent years were high income years, and the 27 percent years were low income years, then his total taxes paid as a share of total income over the 20 years would be less, perhaps significantly less, than 20 percent.
“You can be a person like Romney and have a highly fluctuating income year to year,” Williams said. “Some years Romney's income could be much lower than in other years. When you average just the rates, you can distort the rate you've paid relative to your income over the whole period.”
During a live analysis of Romney's release, The Wall Street Journal's Liam Denning pointed out that a “weighted average would give a more accurate picture,” but “that is a step Mr. Romney has said he won't take”:
We checked with the Romney campaign and the 20-year tax-rate average is a simple one (i.e., the average of the percentage in each year) rather than a weighted one (i.e., where you add up all the tax paid across the 20 years and divide it by all the income).
It's a potentially important difference because the simple average treats each year equally -- whether Romney earned, say, $5 million in that year or $30 million. It is especially important if Romney paid a low tax rate in a year in which he earned a lot but paid a high tax rate in years when he earned less. The weighted average would give a more accurate picture.
Of course, releasing the actual underlying year-by-year data would clear up any confusion -- but that is a step Mr. Romney has said he won't take.