Why Does Mitt Romney Pay Lower Taxes Than His Secretary?

[SW VandeCarr]

http://swampland.time.com/2012/01/24/mitt-romney-releases-tax-returns-paid-lower-taxes/

How did multi-millionaire Mitt Romney get to pay at a lower tax rate than his secretary or many middle and "working class" Americans for that matter? It clearly reflects a regressive tax system when, in fact, the US federal income tax is structured to be progressive. That is, the more you make, the higher your tax rate should be. Since we're talking about income taxes, not some other kind of tax, something must be terribly wrong.

Well, when you see how Romney did it, it's not so easy to see a solution, The basic reason is that wealthy people don't make most of their wealth from income. They make it from investments, which can grow to massive size without being taxed at all. You only pay an income tax when you sell some of your holdings at a profit. Even then, there are loopholes that reduce the tax which benefit the middle class as well as the wealthy. Consider middle class people who retire and sell their home of many years at a big profit

Romney had a taxable income of about $20 million after a charitable donation in the year in question. The amount came from selling stock at a capital gain where the rate is 15% vs the "tax reformed" rate of 35% on ordinary income for Romney's tax bracket. I wouldn't have mattered if it was 80%, since it's not ordinary income. Nothing fancy. Just taking advantage of a loophole that anyone who owns a house or condo or common stock, among other things, can benefit from.

What's your solution, if you believe this needs a solution?

 

[Khashishi]

The solution is to tax unearned income more than earned income.

 

[russ_watters]

IMO, yes, it is a problem that should be fixed and yes, it should be done in a way as so not to discourage/penalize retirement savings and other long term savings (I saved for a house via stocks). Potential solutions:

1. Additional tiers.
2. Tracking how the assets were acquired and taxing them as income if they were acquired as income.
3. Age limited tiers (higher rates for people below retirement age).

 

[SW VandeCarr]

The solution is to tax unearned income more than earned income.

Well that would include interest income. Right now, with interest rates being so low, it's not much of issue. But if bank rates on savings accounts ever get back to the historic 5% or so, you'd be penalizing the middle and lower income earners and discouraging saving. Is that what you want? Besides, there's no earned or unearned income to tax on invesment portfolios that run into the billions unless they generate some income, like bonds. Common stocks may pay dividends and you could tax that, but stock and real estate appreciaciation is the way real wealth is generated. Warren Buffet is a multi-billioaire and virtually all of it comes from his stock in Berkshire Hathaway, a company he founded and managed for many years. Besides, I believe you can re-invest dividends without incurring a tax liability.

 

[SteamKing]

http://swampland.time.com/2012/01/24/mitt-romney-releases-tax-returns-paid-lower-taxes/

How did multi-millionaire Mitt Romney get to pay at a lower tax rate than his secretary or many middle and "working class" Americans for that matter?

If you read this article carefully, it's not Romney's secretary who pays tax at a higher rate, but Warren Buffett's secretary, whom Buffett claims is taxed at a higher rate than he, Buffett, is. Last time I checked, Buffett was a billionaire, while Romney is only a millionaire.

Plus this article is more than 3 years old, and should be considered a contribution-in-kind by Time Magazine to the Obama re-election campaign.

It clearly reflects a regressive tax system when, in fact, the US federal income tax is structured to be progressive. That is, the more you make, the higher your tax rate should be. Since we're talking about income taxes, not some other kind of tax, something must be terribly wrong.

People fall into the trap of thinking that a higher tax rate should automatically equal paying a higher amount of income tax. That ain't necessarily so. There's lots of ways income from investments can be sheltered from being taxed as ordinary income, why charitable giving is deductible from income, heck, even why deducting a certain amount of personal medical expense is deductible.

Capital gains are taxed at several different levels under the Internal Revenue Code. Short-term gains, i.e. those assets held less than a year, are taxed just like ordinary income and at the same rate. Long-term gains are subject to a different tax rate than ordinary income, which rate was generally lower at the time this article appeared. Since then, new higher rates on long-term capital gains were passed and added to the code:

http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States

About a year after the Time article appeared, a study prepared by the Congressional Budget Office was released. The top 40% of wage earners pay 106% of the federal taxes while the bottom 40% of wage earners pay a negative 9% of taxes, which means they get money back from the government, and it's more than just additional withholding from their wages:

http://www.cnbc.com/id/101264757

 

[SW VandeCarr]

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About a year after the Time article appeared, a study prepared by the Congressional Budget Office was released. The top 40% of wage earners pay 106% of the federal taxes while the bottom 40% of wage earners pay a negative 9% of taxes, which means they get money back from the government, and it's more than just additional withholding from their wages:

http://www.cnbc.com/id/101264757

I didn't read the CBO report you referenced. Did you? The top 40% of wage earners is an odd way to parce this. Most analyses parce in terms of the top 1% of net worth, etc or simply "wealth". My key point was that an income tax, progressive or not, does not get at the issue of wealth accumulation and I'm not it saying should, or that wealth accumulation is nessariy "bad". If you read my OP, I said it wouldn't matter if Romney's income tax bracket was 80%. Moreover, even with an increased capital gains tax, it doesn't change the fact that we don't tax wealth, and investment portolios are not taxed except when gaines are realized, they throw off interest or they don't reinvest dividends. If we taxed long term (and that's all we are talking about) capital gains as ordinary income, we would probably see a lot of capital flight and lot of unhappy middle class investors and homeowners That would not be good. Some say the capital gains tax should be a function of taxable income rather than a fixed rate. Suppose it was 3/5 the rate of ordinary income for the bracket. Then Romney would pay 21% and Joe Average might pay 12%. BTW, I know that Romney is a mere millionaire, but he and Buffet were in the same 35% tax bracket.

In my OP, the question at the end was conditioned on "…, if you believe this needs a solution." The jist of your post suggests you believe there's no problem, therefore no solution is required. If anything, your post suggests the rich (the top 40%) are paying way too much. However, I did not see a direct answer as to whether you think the current situation is satisfactory or not.

 

[SteamKing]

In my OP, the question at the end was conditioned on "…, if you believe this needs a solution." Although the jist of your post suggests you believe there's no problem, therefore no solution is required. If anything, your post suggests the rich (the top 40%) are paying way too much. However, I did not see a direct answer as to whether you think the current situation is satisfactory or not.

IMO, it's not that the "rich" are paying this or that fraction of total taxes collected which is worrisome: it's the large number of people who pay no taxes, or even get money back from the government thru programs like the EITC. This portion of the population has no incentive to vote in a way to restrain spending; in fact, for them, it's counterproductive to do so, since their income stream would be adversely affected.

When the fraction of voters who directly benefit from getting part or all of their income from the government (without paying taxes) exceeds 50%, how well or how badly will the rest of the country, which does pay the taxes, fare under these circumstances? The 50% point may not have been reached yet, but there's nothing to suggest that it won't be eventually reached, either.

We've seen how vocal groups can get, especially when it is proposed that programs like Social Security be reformed so that they remain fiscally able to provide the benefits which are promised, and which programs are funded directly by a portion of the payroll taxes collected.

 

[Borg]

The Washington Post ran a good article on Income and Wealth Inequality last week showing that the top 5% hold 76% of all the wealth in this country. The top 1% hold 35% of all the wealth. If I read the linked pdf correctly, the top 1% has $10 million or more in assets. Additionally, people who have $1 million in assets fall around the top 6% in wealth. I would think that people who have contributed consistantly to their 401K throughout their career should be able to achieve that without even including the value of their home.

 

[Mark44]

IMO, it's not that the "rich" are paying this or that fraction of total taxes collected which is worrisome: it's the large number of people who pay no taxes, or even get money back from the government thru programs like the EITC. This portion of the population has no incentive to vote in a way to restrain spending; in fact, for them, it's counterproductive to do so, since their income stream would be adversely affected.

I couldn't agree more.

When the fraction of voters who directly benefit from getting part or all of their income from the government (without paying taxes) exceeds 50%, how well or how badly will the rest of the country, which does pay the taxes, fare under these circumstances? The 50% point may not have been reached yet, but there's nothing to suggest that it won't be eventually reached, either.

The last figure I saw, which was from the IRS about three years ago, was that 47% of federal taxpayers wound up with an income tax liability of $0. I can see letting the bottom 20% or 25% off, but most ought to pay something, IMO, so that they "have some skin in the game."

 

[jim hardy]

Marketing discontent has become too big an industry. It's wrecking the country.
Michael Moore, Glen Beck, Amy Goodman and Bill O'Reilly are all playing the same game. Take your pick.Whenever i hear the "Eat the Rich" mantra i switch to classical music.

 

[SW VandeCarr]

http://www.washingtonpost.com/blogs/wonkblog/wp/2012/09/18/who-doesnt-pay-taxes-in-charts/

This may help. Many over 65 still file returns but pay no tax. There's still a lot underemployement and people who have left the work force. Also, it seems many data bases count the 15-24 age group as part of the work force although many of this group are students and most are paying no income tax.

 

[russ_watters]

I didn't read the CBO report you referenced. Did you? The top 40% of wage earners is an odd way to parce this.

They probably drew a line at zero, then mirrored it up. Every year around tax time the stat of what fraction pay zero or negative income taxes gets reported in the news. Mirroring it just provides an equivalent other side of the coin.

Also, it seems many data bases count the 15-24 age group as part of the work force although many of this group are students and most are paying no income tax.

Workforce is not strictly age dependent, it is self-reported, so no, students are not counted (unless they have jobs).

 

[Vanadium 50]

You do know that Romney's 1040 is public. One can look, and not speculate.

Romney paid $3M of tax on $21M of income. He had a $3M deduction for gifts to charity. He had $12M in capital gains, but - and this is a big but - it was offset by $5M in capital losses. I am not a tax accountant, but I expect this is a bigger effect than the capital gains rate, especially since Romney is subject to the AMT.

And his first name is "Willard". I'd go by Mitt too.

 

[jim hardy]

Romney paid $3M of tax on $21M of income.

3/21 = 14%
my best year ever i paid 15% on 100K gross

i'll not grouse about a captain of industry paying ~ same rate as a working guy. I think it was Parkinson who said:
When taxes are 10% people pay without complaint. .
When taxes are 20% people begin to grumble and avoid.
At 30% they evade.
At 40% they revolt.

 

[Khashishi]

Are they revolting in Denmark now?

 

[jim hardy]

Are they revolting in Denmark now?

Not over taxes. Yet.

The policy agenda (regeringsgrundlag) of the new Social Democratic-Social Liberal-Socialist People’s Party government that came to power in October 2011 put high priority on kick - starting the economy by strengthening competitiveness and reforming the tax code to reduce tax on earned income.

http://www.sgi-network.org/docs/2014/country/SGI2014_Denmark.pdf

 

[gleem]

3/21 = 14%
my best year ever i paid 15% on 100K gross

If the information is correct the 21M is the adjusted gross income and includes the net capital gains contribution. From this the 3M for charity and any other allowed itemized deductions are deducted. So his tax rate is about 3/18 ~ 17%. He probably was able to take significant deductions for his "business" expenses so this rate is probably > 17% . Still not high. When you include SS tax which is small about 0.5% for him compared to the +8% for most people You see an issue. Including SS taxes for me and my wife our gross tax rate (Total money we made/ tax paid) including state tax was about 28%. I had no fancy deductions.

 

[jim hardy]

My 100K was unadjusted gross... don't remember what was adjusted, that less standard deduction for family of 4. Probably pushed me nearer 20% ?
Florida had no personal state income tax , they collected it indirectly through corporate income tax.

Those who want to "tax the rich" ought to push for removing the cap on Social Security, IMHO.
I never resented paying SS - Mom spent most of hers on the grandkids anyway..

 

[Vanadium 50]

. So his tax rate is about 3/18 ~ 17%

Like I said, his 1040 is on the web, and there is no need to speculate. The thing you don't hear about is that he had $5M in offsetting capital losses, so the effective number is more like $16M than $21M. So by your calculation it's 3/13 or 23%.

 

[jim hardy]

I was aiming for % of unadjusted gross, because avoiding income tax via elaborate "Deductions" is what people complain about the rich doing.

I'm old enough to remember Nixon's first term where he paid around $200 income tax.
Dan Rather asked him on national TV "Mr President, do you think you've paid your fair share? "

 

[gleem]

So by your calculation it's 3/13 or 23%.

I checked it out (tax year 2011). Comparing simplistically to my own (total money received/ Fed taxes paid) Romney 13.6% me 20%.

Would Romney's life style be stressed if he paid 20% like I did? After all it would be a 47% increase in the amount he payed.

It is interesting to note that about $3M + is from family trust funds. And also of interest it is 370 pages long! Mine is 6! Mine cost me $350. He must have paid a chunk of change.(interestingly no deduction was made for tax preparation fee)

 

[SW VandeCarr]

IMO, yes, it is a problem that should be fixed and yes, it should be done in a way as so not to discourage/penalize retirement savings and other long term savings (I saved for a house via stocks). Potential solutions:

1. Additional tiers.
2. Tracking how the assets were acquired and taxing them as income if they were acquired as income.
3. Age limited tiers (higher rates for people below retirement age).

Russ's post is one of the few that responds to the jist of my question: Is there a problem? How can it be fixed? Some have suggested that the problem is lower income earners don't pay enough. Even so, how do we fix that? I think it's a symptom of excessive income inequality There will always be income inequality, and more importantly, wealth inequality. How much is too much? With nearly 35% of the national net worth represented by the top 1% of the population, I suggest that's excessive for a modern democracy.

Consider a wealth tax. If you own real property in the US, you already pay a kind of wealth tax. It's called a property tax. It's levied mostly by local governments and school districts. It's the worst of two kinds of wealth tax: 1) tax on net worth 2) tax on gross asset value. Guess which one it is? When did your friendly local tax collector ever ask you about the equity in your home? They don't give a d about the equity in your home! You typically pay a 1-2% tax on some kind of formula for assessing home value which varies all over the country. In many places, especially if you're a newcomer, it's on the assessed market value (AMV) at the time of purchase and which may or may not be re-assessed regularly depending on where you live.

Recent estimates of national net worth have been around $60 trillion ($60T). If we take 35% of that we might get a rough estimate of the net worth of the top 1%: about $21 T. Tax that at an average rate of 1.5%, we get about $300 billion. That's about 10% of the 2015 US federal budget. We are being kind by using net worth instead of gross assets. Net worth can easily be manipulated by taking on debt for the sole purpose of tax avoidance. Taxing gross assets would yield more. Key assets like stocks, bonds, mutual funds, etc and maybe collectables are typically evaluated net of acquisition costs for tax purposes Generally new assets financed by debt will be balanced by the new asset value meaning no change in net worth.. But this is not always the case and some will no doubt open a loophole that will need to be closed.

Any kind of direct wealth tax in the US would require a constitutional amendment since the US consistution, despite amendmends, is a product of the 18th century. A constitutional amendment was passed for the income tax. It's fairly specific and probably won't cover a direct wealth tax at the federal level.http://en.wikipedia.org/wiki/Financ...tates#Estimated_financial_position.2C_Q1_2014

http://en.wikipedia.org/wiki/Wealth_in_the_United_States

 

[jim hardy]

Russ's post is one of the few that responds to the jist of my question: Is there a problem? How can it be fixed? Some have suggested that the problem is lower income earners don't pay enough. Even so, how do we fix that? I think it's a symptom of excessive income inequality There will always be income inequality, and more importantly, wealth inequality. How much is too much? With 35% of the national net worth represented by the top 1% of the population, I suggest that's excessive for a modern democracy.

hmmm

first post came across to me as an attack on mitt Romney.
Sorry i got distracted and didnt address your questions

Is there a problem ? Yes, regulatory capture has produced a multi-thousand page tax code and an industry the works it for the folks who own congress. Those crooks forgave Hank Paulson even the meager capital gains tax on his 3.2 million shares of Goldman stock. http://www.forbes.com/2006/06/01/paulson-tax-loophole-cx_jh_0602paultax.html

How can it be fixed? I've long supported an expenditure tax. Someone who saves his money in the bank is making it available as reserve for economic growth.
If he chooses to live modestly and demand not very much from the economic engine, don't penalize him for that. Tax him according to his demands on the economic engine, as when buys a company to pillage its lush retirement fund or a fleet of corporate jets .
Don't tax savings. Tax stock market transactions. .

Some have suggested that the problem is lower income earners don't pay enough. Even so, how do we fix that?
Flat expenditure tax.

How much is too much [inequality]?
When i first started work for the power company i read an annual report.
I started as a young newbie engineer for $9612 a year ($801 per month), a little less than a journeyman lineman. .
The chairman of the board received not quite 10X that amount.
Today executive salary is more like 300X that of workers.
http://www.forbes.com/sites/kathryn...rs-774-times-as-much-as-minimum-wage-earners/
That's too much.
But is regulation the right response to gluttony?

I think it's wrong to tax people according to what they have acquired through presumably honest work. Tax them on instead on what they demand from society, ie buy.
In other words, tax it on the way out of their bank account not on the way in.

that's what i think.

 

[SW VandeCarr]

I've long supported an expenditure tax. Someone who saves his money in the bank is making it available as reserve for economic growth.
If he chooses to live modestly and demand not very much from the economic engine, don't penalize him for that. Tax him according to his demands on the economic engine, as when buys a company to pillage its lush retirement fund or a fleet of corporate jets .
Don't tax savings. Tax stock market transactions.

Many countries balance income taxes with a value added tax (VAT) It's a tax on levels of production, but is ultimately paid by the consumer. It's typically 15-20%. of the purchase price and is embedded in the purchase price so it could be called a "hidden" tax. As with any general consumption tax, the more you spend, the more tax you pay. The downside is that such taxes could depress sales and the economy with it . Europeans have gotten used to it and it has lowered their income tax burden.

Flat expenditure tax.

How is that different than a retail sales tax or VAT?

How much is too much [inequality]?

When i first started work for the power company i read an annual report.
I started as a young newbie engineer for $9612 a year ($801 per month), a little less than a journeyman lineman. .
The chairman of the board received not quite 10X that amount.
Today executive salary is more like 300X that of workers.
http://www.forbes.com/sites/kathryn...rs-774-times-as-much-as-minimum-wage-earners/
That's too much.
But is regulation the right response to gluttony?

Are you saying that taxation is a form of regulation? It is in a way, but it's generally distinguished from, for example, the US Code of Federal Regulations. IMO, the problem of overpayment of top executives can only partially be curbed by taxation and is probably too complex to regulate. Shareholders have to assert their authority as corporate owners over executive abuses.

I think it's wrong to tax people according to what they have acquired through presumably honest work. Tax them on instead on what they demand from society, ie buy.
In other words, tax it on the way out of their bank account not on the way in.

that's what think.

Well, as I said, with any general consumpion tax, the more you spend, the more you pay. Or do you mean that you would have a higher consumpion tax on the wealthy than on others? In other words, the rich guy pays more for the same goods as Joe Average. I don't know how you do that.

 

[russ_watters]

I think it was Parkinson who said:
When taxes are 10% people pay without complaint. .
When taxes are 20% people begin to grumble and avoid.
At 30% they evade.
At 40% they revolt.

What about people who pay -10%?

 

[russ_watters]

When you include SS tax which is small about 0.5% for him compared to the +8% for most people You see an issue. Including SS taxes for me and my wife our gross tax rate (Total money we made/ tax paid) including state tax was about 28%. I had no fancy deductions.

Including SS is tough because of its different structure and purpose. The government could easily re-label it as something other than a tax almost literally just by changing the labels on the forms. And if we consider it a tax (and measure ourselves against each other), it would also be fair to consider how the flat-to-regressive nature reverses when we retire. It is easier, IMO, to just ignore it for conversations like this, since it mostly cancels-out to zero over your lifespan.

 

[russ_watters]

I was aiming for % of unadjusted gross, because avoiding income tax via elaborate "Deductions" is what people complain about the rich doing.

While I do think the capital gains tax is too low for someone like him, a capital loss is not an "elaborate "deduction"", it's the same profit/loss calculation everyone does when they have business expsense or buy/sell any assets. So I think it is highly misleading (downright dishonest) of the media to report his effective tax rate without including the losses.

 

[russ_watters]

Some have suggested that the problem is lower income earners don't pay enough.

I agree with the others that the other end of the spectrum is a big problem as well (much bigger in number of people, not sure if bigger or smaller in how much it costs us), but a completely separate problem.

There will always be income inequality, and more importantly, wealth inequality. How much is too much? With nearly 35% of the national net worth represented by the top 1% of the population, I suggest that's excessive for a modern democracy.

Well, as I suggested above, the SSA could just re-label all of the forms and *poof* the wealth distribution would be radically shifted downard and the [SS included] tax rate would radically shift upwards. Australia changed its version of social security in that way (and more), and as a result it is now the wealthiest country on earth, per capita.
http://www.dailymail.co.uk/news/art...lia-richest-country-world-fifth-year-row.html

Personally, I'd favor such a change because it would get people thinking about SS more intelligently than they currently do and maybe enable us to actually fix its structure.

Recent estimates of national net worth have been around $60 trillion ($60T). If we take 35% of that we might get a rough estimate of the net worth of the top 1%: about $21 T. Tax that at an average rate of 1.5%, we get about $300 billion. That's about 10% of the 2015 US federal budget. We are being kind by using net worth instead of gross assets. Net worth can easily be manipulated by taking on debt for the sole purpose of tax avoidance. Taxing gross assets would yield more. Key assets like stocks, bonds, mutual funds, etc and maybe collectables are typically evaluated net of acquisition costs for tax purposes Generally new assets financed by debt will be balanced by the new asset value meaning no change in net worth.. But this is not always the case and some will no doubt open a loophole that will need to be closed.

Any kind of direct wealth tax in the US would require a constitutional amendment since the US consistution, despite amendmends, is a product of the 18th century. A constitutional amendment was passed for the income tax. It's fairly specific and probably won't cover a direct wealth tax at the federal level.

As soon as such a plan gets put on the table, much less passed, all of my non-material assets will go overseas.

 

[russ_watters]

How can it be fixed? I've long supported an expenditure tax. Someone who saves his money in the bank is making it available as reserve for economic growth.
If he chooses to live modestly and demand not very much from the economic engine, don't penalize him for that. Tax him according to his demands on the economic engine, as when buys a company to pillage its lush retirement fund or a fleet of corporate jets .
Don't tax savings. Tax stock market transactions. .

Some have suggested that the problem is lower income earners don't pay enough. Even so, how do we fix that?
Flat expenditure tax...

I think it's wrong to tax people according to what they have acquired through presumably honest work. Tax them on instead on what they demand from society, ie buy.
In other words, tax it on the way out of their bank account not on the way in.

that's what i think.

I think your plan would have the opposite effect of what you intend. It would result in a vast increase in what the lowe end gets taxed and a vast reduction in what the upper end gets taxed, since the rich spend a much lower fraction of their income than those in the middle and at the lower end do.

 

[SW VandeCarr]

I

As soon as such a plan gets put on the table, much less passed, all of my non-material assets will go overseas.

Are you in the top 1% of the population which has 35% of the national net worth? That's whom it's indended for. I don't know what the net worth cut off level would be, but 1.5 % (0.015) would not exactly break a taxpayer in that select group.