In discussing Paul Ryan's federal tax return, the Associate Press's Stephen Ohlemacher notes
Ryan, R-Wis., paid an effective federal tax rate of 15.9 percent in 2010 and 20 percent in 2011, according to tax returns released by the Romney campaign Friday evening.
He then goes on to compare this to the effective tax rate paid by Mitt Romney.
Romney paid about $3 million in federal income taxes in 2010 for an effective federal tax rate of 13.9 percent. For 2011, Romney's campaign estimates that he will pay about $3.2 million for an effective federal tax rate of 15.4 percent.
On average, middle-income families, those making from $50,000 to $75,000 a year, pay 12.8 percent of their income in federal taxes, according to the nonpartisan Joint Committee on Taxation. By comparison, Romney made about $21 million a year in 2010 and 2011.
Wow! It seems like Mitt Romney gets away with paying little compared to Paul Ryan and the rest of us. Why Ohlemacher even compares this to Barack Obama, who it appears took a whipping on his taxes.
President Obama and his wife reported paying $162,074 in federal taxes last year on $789,674 in adjusted gross income, for an effective tax rate of 20.5 percent.
Son of a biscuit eater (I'm in the south, remember?). That Romney is getting away with murder. Or is he?
Ohlemacher might want to differentiate between marginal, effective and average tax rates in order to give a less misleading comparison.
First, Ohlemacher acknowledges that Romney's income is largely from investments, including capital gains and dividend income. These are taxed at lower marginal rates than labor income.
What Ohlemacher fails to explain, or doesn't understand, is that marginal and average tax rates are not the same thing. Nor does he include all federal taxes paid by all people.
Let's start with the dividend income earned by Romney. According to this, the effective tax rate on corporate income has averaged about 25.6% since the 1980s. However, temporary changes enacted for 2010 and 2011 allowed corporations to pay an effective tax rate of just 12.1% for those two years. So let's say that Mitt Romney's share of the corporate profits earned by a company in which he owned stock in 2011 was $100. That company paid $12.10 in federal corporate income taxes for that year ($25.60 for most of the past 30 years) and disbursed $87.90 to Mr. Romney in the form of dividend income. Mr. Romney then, according the Mr. Ohlemacher, paid in dividend taxes $13.54 of that $87.90, for an effective tax rate of 15.4%. This means that total federal taxes paid on Mr. Romney's share of that company's $100 profit was $25.64, for an effective tax rate of 25.64%.
Now, there are a host of problems with this, including the fact that investors do not incur the total burden from a tax imposed on corporate income. And in a typical year the numbers would have been $25.60 paid in corporate income taxes on that $100 profit, and $11.46 in taxes paid on the remaining $74.40 disbursed as dividend income to Mr. Romney. This amounts to an effective tax rate of 37.06% that Mr. Romney typically would have paid in most years rather than the 25.64% for the last two years.
But as I noted here, using CBO data, when you include all federal taxes paid and consider the average for all of these, the rich have consistently been paying over 25% of their income in federal taxes. The average rate for all federal taxes paid by the top twenty percent of income earners in the U.S. has a) exceeded the rate paid by all other income groups (we would expect that with a progressive tax system), and b) been the only rate that has not declined substantially since 1979.
Whether you agree or disagree that the rich should pay more in taxes, using marginal and effective tax rates is misleading, and raising the marginal rate is counterproductive.
I am not a fan of Mitt Romney, nor am I a fan of Paul Ryan. But failure to understand the difference between marginal and average tax rates, and forgetting to include all taxes paid, lead to faulty analyses and bad policy decisions. In either case, sound policy calls for lowering marginal tax rates and broadening the tax base by eliminating EVERY deduction. Tax policy today is nothing more than rent-seeking by speicial interests to have their product or service treated differently in the tax code, which distorts both production and consumption. It also provides avenues for the wealthiest to shield their income from taxes. If you want to reduce the deficit, reduce tax rates and broaden the tax base.