At the second presidential debate, Obama attacked the wealthy business man for paying “lower tax rates than somebody who makes a lot less.” During an interview with 60 Minutes earlier this year, Romney defended paying a lower effective tax rate than someone making $50,000.
In a recent report, Bloomberg News breaks down exactly how Romney avoids paying a higher tax rate through the use of legal loopholes.
Before 1997, rich people could avoid paying taxes through a tax shelter that allowed them to take advantage of the exempt status of charities without actually donating a lot of money. Congress cracked down on this law in 1997, but still allowed people who were using it to continue. Mitt Romney was one of these people. He had just established this arrangement as the CEO of Bain Capital, a private equity firm. According to Bloomberg reports,
In this instance, Romney used the tax-exempt status of a charity — the Mormon Church, according to a 2007 filing — to defer taxes for more than 15 years. At the same time he is benefitting, the trust will probably leave the church with less than what current law requires, according to tax returns obtained by Bloomberg this month through a Freedom of Information Act request.
In general, charities don’t owe capital gains taxes when they sell assets for a profit. Trusts like Romney’s permit funders to benefit from that tax-free treatment, said Jonathan Blattmachr, a trusts and estates lawyer who set up hundreds of such vehicles in the 1990s.
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