It is all over the news: Mitt Romney pays 15% of his income in income taxes. Commentators everywhere are complaining that many people who make less income are paying 28%-35% tax rates. Really???
Let's see. I am firmly in the 99% who make less than $200,000 yearly. Of my total gross income, I paid 8% in Federal income tax. Now, some of my income is in the 28% bracket, but I have a mortgage deduction, I tithe to my church, and I have a tuition credit for a son in graduate school, plus I am putting tax-deferred income into a 401(k). All this means that my taxable income is about half of the gross.
It was also reported not long ago, not nearly with so much fanfare, that 47% of the U.S. population pays no Federal income tax at all, and it wasn't even mentioned that a few million people take the "Earned Income Tax Credit", which gives them a "refund" when they have had nothing withheld. It is a kind of welfare payment without the name.
So let's see, 99-47 leaves 52% of the American public making between $20,000 and $200,000, and thus paying income taxes. Let's look at a couple scenarios, courtesy of the HR Block 2011 Tax Estimator.
- A 25-year-old married couple with no children eking it out on $20,000, with no deductible expenses. Their total tax for the year is $100.
- A 25-year-old single person who earns $48,000 and has $120 in interest income (a saver!), who also gives $1,200 to charity. The total tax bill is $5,780 (ouch), or 12% of gross income. Single people have the highest rates.
- Let's take the same person, now married, five years later, with three kids. No advancement, so the income and giving are the same, but now the tax bill is only $408, less than one percent.
- A middle-aged couple earning $100,000 with $1,000 of interest income and $5,000 of long-term capital gains (they got lucky in the market). They pay $10,000 in mortgage interest, and almost tithe, giving $10,000 to their church. Total income $106,000. Total tax $12,000, or 11.3%.
- Finally, a couple approaching the "1% level", who have combined earned income of %140,000, $1,000 of interest income, and $20,000 in long-term capital gains. They give less, $5,000, but have a McMansion that has mortgage interest of $30,000. Total income 161,000. Total tax $19,100 or 11.9%.
There is a second issue. That 15% is a second tax; to make the investments from which he is earning capital gains, he had to first earn money and pay taxes on it (perhaps at 15%, perhaps at 28 or 35%). Then when his investment earns money, he pays tax on the new earnings. If you make an investment that loses money, you don't get 15% back from the government for your losses, though you can use losses to offset gains, but if you have a net loss for the year, you are just out the money.
Let's pick some real issues to heckle the candidates with. This one is a phony issue.