As many people have said, the Romney tax return story is in the end less about him as an individual than about how it shows and dramatizes the workings of the current U.S. income tax system.
I considered the biggest revelation of his 2010 tax return to be the net capital loss carryover, showing that he had zero net income from capital gains (including carried interest) in 2009. I noted that no doubt he had a lot of genuine loss stocks given the stock market price drop, but that (even without tax sheltering to create fake tax losses) he may have engaged in "loss harvesting," or selling losers while holding winners.
Should one add the Seinfeld line, "Not that there's anything wrong with that"? Yes if one is evaluating Romney's behavior - why wouldn't anyone engage in perfectly legal loss harvesting when the system permits it to work. (Although again, the fact that it could work against carried interest income shows a second aspect of the favorable tax treatment - capital gain not only gets a lower rate than ordinary income, but can be offset by harvestable capital losses.) But it shows a big problem with our tax system. Suppose we even stipulate that Romney had an overall loss on his investment portfolio in 2009, not just losses on one side of the ledger that he was able to harvest. Income is a "net" rather than a "gross" concept, so of course he should be able to deduct losses against gains, all else equal. But suppose we are looking at the 1990s massive run-up in stock prices. In that scenario, Romney, along with any other sensible investor, would have had huge gains that he would have taken care to avoid realizing for tax purposes unless absolutely necessary.
Another issue: in yesterday's Wall Street Journal, John Berlau and Trey Kovacs argue that Romney's tax rate was actually as high as 44.75%. This is a pretty simple calculation. You take the 35% corporate tax rate, and then layer a 15% dividend or capital gain rate on top of it. Thus, $100 earned through a corporation drops to $65 after paying corporate tax, and then to $55.25 after paying a 15% shareholder level tax. So, if we ignore the myth of separate corporate personhood, we should realize that the whole thing is really paid by the shareholder.
Let's leave issues regarding the incidence of the corporate tax to one side, since they are actually equally raised by a tax that is levied directly on business owners. Berlau and Kovacs are entirely right to suggest that the corporate level tax matters to the analysis. I frequently noted this point in the carried interest debate a couple of years back. But they are of course wrong (in classic WSJ fashion) to simply assume that corporations are actually paying tax on 35% of their income. The average or effective rate, not the marginal rate, is what matters if one is thinking about distributional effects (although efficiency issues turn on the marginal rate, which may effectively be 35% in many cases even if the company's average rate is much lower).
Another point that I made in the carried interest debate, and that is relevant here (again, much more for assessing the broader issues than with regard to Romney himself) is that people realizing capital gains from selling corporate stock do not necessarily bear, even implicitly, the corporate tax. And this may be especially true for private equity, quick-turnaround firms like Bain (wholly aside from the issue of what one thinks of Bain's activities).
Let's take 3 cases in which a private equity firm swoops in, buys a company for a low price, and then reaps large profits by selling it for a high price.
Case 1: They figured out how to make the company more efficient and profitable. These increased profits will bear the 35% corporate tax (if the average or effective rate is actually at that level), so the Berlau-Kovacs analysis holds. (Note, however, that per the famous article by Shleifer and Summers, it's possible that this involved breaking implicit long-term employment contracts with the workforce, rather than generating true efficiency gains.)
Case 2: They figured out how to make the company more tax-efficient (i.e., to lower its tax rate), and thus it sells for more. This time their capital gain does not reflect income that has already been taxed at the corporate level. (The corporation is not taxed for the after-tax profit from lowering its tax rate.)
Case 3: They are smart traders, and figured out that the company was under-valued. Here the profit is a return to their labor in figuring out true value (or for that matter in skillfully playing the Keynesian beauty contest game), and it is not being double-taxed by reason of the 35% corporate tax rate, which was a constant.
One last point about all this: It is striking how many of the better commentators across the political spectrum draw one of the right lessons, which is that a well-designed progressive consumption tax could work far better than the current income tax. David Frum made this point recently, and I believe so has Matt Yglesias from time to time. But this point continues to lack any apparent political traction at any point in Washington political debate.