I was just reading another leftist try to make the claim that Mitt Romney’s tax rate is lower than “ordinary Americans.” Mitt’s 2011 tax return is right here if anyone is curious.
The claim always looks something like this: “In 2011, Mitt Romney paid $1.9 million in taxes on $13.7 million of income — a 13.9% tax rate (and this claim is calculated to fire up working Americans who supposedly pay much high tax rates than Romney.) As always, this claim by those on the left is complete bogus…and those who use it to attack Romney are either misrepresenting the facts or they do not understand tax rates (or both.) Expect some form of this question to come up in the debates.
Here is how the average American can make an apples to apples comparison between Mitt Romney’s tax rate and their own. (I am an accountant, so I should be able to offer a little intelligence in this subject matter.)
Let’s assume the average American household makes $65,000/year, contains two spouses, a mortgage, a couple of kids and a couple of cars. (According to this website, that is pretty close to average.)
First — The household’s taxable income is not $65,000 because the couple pays health insurance, pays interest on their mortgage, property taxes, etc…and even if the couple does not take itemized tax deductions, it receives a standard deduction as an alternative. Further – the household receives a $1,000 tax credit per child. Finally, with graduated rates — the first $17,000 of the couple’s taxable income is taxed at 10% and the rest (up to $69,000) would be taxed at 15%. Therefore, a realistic tax return calculation for this hypothetical household would look more like this:
Adjusted Gross Income: $65,000
Standard Deduction: ($11,600)
Exemptions (4 x 3,700):($14,800)
Taxable Income: $38,600 (15% tax bracket)
Tax Before Credits: $ 4,940
Tax Credits: ($ 2,000)
Tax After Credits: $ 2,940
Effective Tax Rate on $65,000 of income: 4.5%
So, yes — the average American household pays a lower income tax rate than Mitt Romney.
How about an above average American household, say, one that earns $100,000 per year? (Same assumptions, except now any taxable income over $69,000 is going to be taxed at 25%)
Adjusted Gross Income: $100,000
Standard Deduction: ($11,600)
Exemptions (4 x 3,700): ($14,800)
Taxable Income: $73,600 (25% tax bracket)
Tax Before Credits: $10,050
Tax Credits: ($ 2,000)
Tax After Credits: $ 8,050
Effective Tax Rate on $100,000 of income: 8.05% (If itemized deductions were $20,000 for this taxpayer–which is pretty normal in this income range–the effective rate drops to 6.3%)
If we expand this example to a $150,000/year household under the same hypothetical assumptions, it gets a bit more interesting (but again – this is getting more and more above average household income):
Adjusted Gross Income: $150,000
Standard Deduction: ($11,600)
Exemptions (4 x 3,700): ($14,800)
Taxable Income: $123,600 (25% tax bracket)
Tax Before Credits: $ 22,550
Tax Credits: ($ 2,000)
Tax After Credits: $ 20,550
Effective Tax Rate on $150,000 of income: 13.7% (If itemized deductions were $30,000 for this taxpayer–which is pretty normal in this income range–the effective rate drops to 10.6%)
Also — People conveniently forget that one of the reasons Mitt pays such a low tax rate is due to the fact that he consistently contributes around 15%-20% of his income to charitable organizations…because that is several million dollars of his gross income tax won’t be taxed.
I suppose it is possible that were we to examine the tax rates on Americans making $200,000 or $250,000 per year or more…we might find those who pay a higher effective tax rate than Mitt Romney, but are these “ordinary Americans?” Obama doesn’t think so — he wants those Americans’ taxes raised even higher.
Update
I’ve been asked several times why I excluded social security taxes from my analysis. Here’s why: Social security is a forced savings plan. In theory, you are funding your own retirement with your social security contributions because you receive a retirement benefit statement each year that you pay into the system. I consider social security more of a “mandatory pension plan contribution” than I do a tax. Thus, it shouldn’t be included in your effective tax rate any more than should the 10% going into your 401(k) plan because you will be living off this money when you retire. If you don’t pay into the system, you don’t get any when you retire.
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