Thursday, January 19, 2012

Do the 99 percent pay more taxes than Mitt Romney?

kw: taxes, politicians

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.
1. 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.
2. 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.
3. 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.
4. 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%.
5. 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 you have it. Reasonable scenarios that show how the 15% Mitt Romney paid is by no means "unfair". In fact, he is paying more than most.

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.