Soaking the rich
I am a big fan of newly elected Congresswoman Alexandria Ocasio-Cortez. One of her recent proposals is to institute a top marginal tax rate of 70%. It would apply to only those Americans earning more than $10 million per year, and only on that portion of their income in excess of that amount.
A New York Times editorial written by Paul Krugman agrees with the proposal made by Congresswoman Ocasio-Cortez. It is cogent, logical and cites highly regarded economists who are experts in the area of public taxation. But there is a factor that has been omitted.
That is the concept of effective tax rate. Not the top marginal rate one is subject to, but what percentage of the income is actually paid in income tax. We can better understand the concept by looking at the 2011 tax return of Mitt and Ann Romney, which was released during his failed presidential bid in 2012.
The Romneys earned a total of $13,696,951 in 2011 broken down as follows:
$3 million in interest income
$3.6 million in ordinary dividends
$2.2 million in qualified dividends (which is included in the above number)
$450,000 in business income
$6.8 million in capital gains income (all of which were long-term gains)
-$485,000 in other losses
a couple of other small amounts that further reduced their income by $91,000
The top marginal rate in 2011 was 35% and would have applied to all of their income in excess of $380,000.
They were able to claim $4.7 million in itemized deductions (one of those was a deduction for state income taxes paid of $1.3 million and $274,000 of property taxes; the so-called SALT deduction is now capped at $10,000 annually).
Their taxable income was reduced to $9 million. The tax on that amount was $2,015,346, which was reduced by a credit of $102,790 in taxes they paid to foreign governments. When you add in the self-employment tax on the business income, their total tax liability was $1,935,708
That's an effective tax rate of only 14.13%. Why so much lower?
The itemized deductions
The capital gains being taxed at a more favorable rate of only 15%
The qualified dividends being taxed at that same favorable rate of only 15%
The fact is that of the $13.7 million the Romneys earned in 2011, $10.4 million would still be taxed at a lower rate of 20% thanks to the favorable tax rates that continue to be afforded to long-term capital gains and qualified dividends. No matter how high that top marginal rate.
Congress needs to address the issue of effective tax rates if it is going to generate more tax revenue from the wealthiest Americans.
A New York Times editorial written by Paul Krugman agrees with the proposal made by Congresswoman Ocasio-Cortez. It is cogent, logical and cites highly regarded economists who are experts in the area of public taxation. But there is a factor that has been omitted.
That is the concept of effective tax rate. Not the top marginal rate one is subject to, but what percentage of the income is actually paid in income tax. We can better understand the concept by looking at the 2011 tax return of Mitt and Ann Romney, which was released during his failed presidential bid in 2012.
The Romneys earned a total of $13,696,951 in 2011 broken down as follows:
$3 million in interest income
$3.6 million in ordinary dividends
$2.2 million in qualified dividends (which is included in the above number)
$450,000 in business income
$6.8 million in capital gains income (all of which were long-term gains)
-$485,000 in other losses
a couple of other small amounts that further reduced their income by $91,000
The top marginal rate in 2011 was 35% and would have applied to all of their income in excess of $380,000.
They were able to claim $4.7 million in itemized deductions (one of those was a deduction for state income taxes paid of $1.3 million and $274,000 of property taxes; the so-called SALT deduction is now capped at $10,000 annually).
Their taxable income was reduced to $9 million. The tax on that amount was $2,015,346, which was reduced by a credit of $102,790 in taxes they paid to foreign governments. When you add in the self-employment tax on the business income, their total tax liability was $1,935,708
That's an effective tax rate of only 14.13%. Why so much lower?
The itemized deductions
The capital gains being taxed at a more favorable rate of only 15%
The qualified dividends being taxed at that same favorable rate of only 15%
The fact is that of the $13.7 million the Romneys earned in 2011, $10.4 million would still be taxed at a lower rate of 20% thanks to the favorable tax rates that continue to be afforded to long-term capital gains and qualified dividends. No matter how high that top marginal rate.
Congress needs to address the issue of effective tax rates if it is going to generate more tax revenue from the wealthiest Americans.
posted by me at 6:47 AM
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