Here’s the good news for Mitt Romney from the tax returns his campaign released this morning: he’s due a refund!

It’s true. Don’t listen to all the left-wing nonsense about Romney paying hardly any taxes while ordinary Americans stagger under the burden of Uncle Sam’s demands. According to their preliminary 1040 for 2011, Mitt and his wife Ann are paying the federal government too much, not too little. Last year, in making quarterly advance payments on their tax liability, they overdid it by $207,818, which come April 15th they will be entitled to get back.

O.K., I’m joking—not about the figures, which are accurate, but about the substance, which is perfectly legal but pretty scandalous all the same. Regardless of how this plays out in the Republican primary race, Romney has done the country a great public service by offering up his personal finances as a shining example of all that’s wrong with the tax code after thirty years of politicians fiddling with it to make it more generous to the very rich.

Let’s be clear: Romney did nothing wrong. As he said in last night’s debate, he and his wife paid the U.S. government what they owed, and not a penny more. Like many very wealthy people, they appear to have employed a small army of financial advisers and a perfectly reputable accounting firm, PricewaterhouseCoopers, to minimize their tax exposure using a range of methods. Over the years, these methods have included setting up tax-sheltered retirement vehicles, establishing family trusts, making offshore investments, and exploiting one particular tax break that Romney was entitled to use by dint of his employment at Bain Capital.

By now, you’ve probably seen the headlines about the returns. In 2010 and 2011, Romney and his wife made $42.6 million, almost all of it in the form of income from their various investments, which is taxed at a rate of fifteen per cent. In those two years, the Romneys paid the federal government $6.2 million. Confirming what Mitt said in New Hampshire last week, their effective tax rate in 2011 will be 15.4 per cent. In 2010, they did a bit better, at 13.9 per cent.

Cue an avalanche of articles and online rants pointing out that Romney is paying a smaller proportion of his income to the federal government than most middle-class Americans who actually work for a living and take home a fraction of what he does. Actually, that’s not quite true. According to the non-partisan Tax Policy Center, in 2007, the last year for which figures are available, households in the middle fifth of the income distribution—roughly speaking, those earning between $50,000 and $75,000 a year—paid 14.3 per cent of their income to the federal government, which is about the same as Mitt.

So it’s a bit of a stretch to say that Romney is paying less tax than the average Joe. He’s paying about the same as them. But he’s certainly paying less than most people reading and writing articles about him in places like the New York Times, the Wall Street Journal, and this Web site. I would guess that most of these folks fall into the fourth income quintile—households whose taxable income is roughly $75,000 to $150,000 a year. According to the Tax Policy Center, in 2007 those households paid an effective federal tax rate of 17.4 per cent.

So, yeah, the Mittster is screwing many of the rest of us. But the people he’s really putting one over on are his fellow members of the top one per cent, who pay, on average, almost thirty per cent of their income to the federal government. If anybody should be flying down to Jacksonville to heckle him at Thursday’s debate, it’s the wealthy corporate executives, entrepreneurs, lawyers, doctors, and entertainers who make much of their loot in the form of ordinary income, which is taxed at a rate of up to thirty-five per cent.

In 2010 and 2011, more than half of the Romneys’ income (about $23.3 million) came from capital gains on investments held by family trusts. Thanks to Presidents Bush and Clinton, most of this income is taxed at fifteen per cent. But it’s not just the low tax rate on investment income that works to Mitt’s advantage. As I pointed out last week, he and his family also benefit from a second, much narrower and more exclusive, loophole in the tax code—one confined to the chosen few who manage private-equity firms and hedge funds: Mitt, Steve Schwartzman, John Paulson, David Rubenstein, Steven A. Cohen, and the like.

Under an obscure but vigorously defended item of the tax code, managers of hedge funds and private-equity funds are allowed to classify much of the fee income they receive from their investors as “carried interest,” which the I.R.S. treats in the same way as a capital gain. In a conference call with reporters this morning, Benjamin Ginsberg, a senior attorney for the Romney campaign, revealed that in the past two years Bain Capital has paid Romney almost $13 million in “carried interest”—$7.4 million in 2010 and $5.4 million in 2011.

The “carried interest” deduction has no economic justification—firms like Bain don’t put any of their own capital at risk to generate it—but its sure helps folks like Mitt. If he and his wife had been forced to treat that $13 million as regular income, they would have had to pay about $4.5 million in federal tax on it. As it was, they paid about $1.9 million in taxes, saving them a handy $2.6 million.

Nice “work” if you can get it.

All told, the Romneys’ tax returns for 2010 and 2011 run to about five hundred pages. I’m still going through them. Aside from the actual figures, here are some other things I’ve noticed so far:

Romney and his wife are generous charitable givers, especially to the Church of Latter Day Saints. In keeping with Mormon tradition, they appear to give at least ten per cent of their income to the faith. In 2011, for example, they made a $2.6 million cash donation to the church.

Until very recently, the Romney trusts had extensive offshore investments, which sometimes offer tax advantages. At one point, the Romneys also had a Swiss bank account, but that has now been closed down.

The 2010 return listed investments in Australia, Bermuda, the Cayman Islands, Germany, Ireland, and Switzerland. It’s not clear whether these investments were large or small, but when you are running for President it’s a bit inconvenient to have some of your money in investment funds with names and addresses like these: Swiss Prime Site, Froburgstrasse, 15 PO Box, Olten, CH-4601, Sz; Castle Garden Funding, c/o Ogier Fid Svs (Cayman) Ltd., PO Box 1234, Queensgate House, George Town, Crand Cayman; Barracuda Investments, 6th Floor, South Bank House, Barrow Street, Dublin 4, Ireland; Sankaty High Yield Investors, c/o Quorum Int. Ltd., 31 Church St, Hamilton, Bermuda.

According to the 2010 return, at least one of the Romney trusts invested in a hedge fund operated by Goldman Sachs. Strictly speaking, this entity—Goldman Sachs Hedge Fund Partners III, LLC—appears to be a fund-of-funds, which means it invests money in other hedge funds that investment managers at Goldman select. The return lists six of them: Karsch Capital, Lansdowne UK Equity, Maverick Fund USA, Sonterra Capital Partners, Taconic Capital Partners, Viking Global Equities. The Romneys buy their own health insurance, or, at least, they did in 2010. And it cost them $14,176.



Photo by Cheryl Senter/The New York Times/Redux.