To paraphrase James Carville
James Carville was one of the key figures in the election of Bill Clinton to the presidency in 1992. The fine film The War Room gives a good rendering of Carville's involvement in that campaign. The saying "It's The Economy Stupid" comes from one of three bullet point statements that read as follows:
Change vs more of the same
The economy, stupid
Don't forget health care.
Recently, newly-elected Congresswoman Alexandria Ocasio-Cortez floated the idea of a top marginal tax rate of 70% on incomes in excess of $10 million. Today Senator Elizabeth Warren talked about a proposal to impose a wealth tax. Her proposal to tax wealth is not the same as an income tax and is a subject for a separate blog. I wrote in detail some time back about the problems involved in taxing wealth and will search for that piece.
Meanwhile, back to Mr. Carville and paraphrasing that "saying" of his. It is the effective rate, stupid. Marginal rates are the so-called tax brackets. But what really matters is the effective rate, which is the percentage of a taxpayers income that they actually pay in taxes. To better understand this concept, let's look at the actual income and taxes from 2011 involving presidents and candidates. Numbers are rounded, but effective rate is shown to two decimal points:
Name Total Income Federal Tax Paid Effective Tax Rate
Romney $13.7 million $1.93 million 14.12%
Clinton $14.7 million $4.33 million 29.49%
Obama $845 thousand $162 thousand 19.18%
Bush (Jeb) $6.3 million $2.26 million 35.85%
Cruz (Ted) $1.8 million $565 thousand 31.12%
Why is there so much disparity? Fully 2/3rds of the Clinton's income in 2011 was from self-employment. When you have self-employment income, all of that income is subject to income tax and self-employment taxes. Meanwhile, $9 million of the Romney's income was from long-term capital gains and qualified dividends. So that $9 million wasn't taxed at the top marginal rate of 35% that year, but at the much more favorable rate of 15%. That saved the Romneys $1.8 million in federal income tax.
Almost all of Jeb Bush's 2011 income was from self-employment. And unlike the Romneys, whose itemized deductions of $4.6 million represented 34% of their income, the Bush tax return shows itemized deductions of $124,760 (1.9% of his income).
Favorable tax treatment of certain types of income and large itemized deductions are what drive the effective tax rate paid by the wealthiest Americans down from their top marginal rate. And in spite of the prevailing wisdom that those wealthiest paid a lot more tax in the 1950s, the effective tax rate history tells a different story.
As you can see, the effective tax rate paid by the top 1 percent is only 5.6% lower in 2014 than it was in the 1950s.
There are other issues involved as well. Let's look at the income, tax paid and effective rate from some 2005 tax returns of presidents and candidates:
Bush Jr (Dubya) $739 thousand $188 thousand 25.41%
Cheney $8.8 million $530 thousand 6.00%
Clinton $18.3 million $5.6 million 30.44%
Trump $49.5 million $38.4 million 77.59%
Whoa there. Trump paid 77.59% of his income in federal tax? Based on the standard measurement of effective rate. But those numbers include his ability to claim a Net Operating Loss (NOL) of $103.2 million. Add that back in and his line entry looks like this:
Trump $152.7 million $38.4 million 25.16%.
It was that pesky Alternative Minimum Tax (AMT) that resulted in his NOL being added back into his income for the purpose of the AMT calculation. Without the AMT, there's a third view of that line:
Trump $49.5 million $7.17 million 14.48%
Trump $152.7 million $7.17 million 04.69%
As to why Dick Cheney and his wife paid such a low effective tax rate, their itemized deductions reduced their income of $8.8 million by $6.9 million. That allowed them to avoid tax on 78% of their income. Since the tax return they released did not include the page of itemized deductions, we'll never know what deductions they took.
A top marginal rate of 70% on income in excess of $10 million is meaningless without changes that ensure the effective tax rate those people pay goes up.
It's the effective rate. Period.
Change vs more of the same
The economy, stupid
Don't forget health care.
Recently, newly-elected Congresswoman Alexandria Ocasio-Cortez floated the idea of a top marginal tax rate of 70% on incomes in excess of $10 million. Today Senator Elizabeth Warren talked about a proposal to impose a wealth tax. Her proposal to tax wealth is not the same as an income tax and is a subject for a separate blog. I wrote in detail some time back about the problems involved in taxing wealth and will search for that piece.
Meanwhile, back to Mr. Carville and paraphrasing that "saying" of his. It is the effective rate, stupid. Marginal rates are the so-called tax brackets. But what really matters is the effective rate, which is the percentage of a taxpayers income that they actually pay in taxes. To better understand this concept, let's look at the actual income and taxes from 2011 involving presidents and candidates. Numbers are rounded, but effective rate is shown to two decimal points:
Name Total Income Federal Tax Paid Effective Tax Rate
Romney $13.7 million $1.93 million 14.12%
Clinton $14.7 million $4.33 million 29.49%
Obama $845 thousand $162 thousand 19.18%
Bush (Jeb) $6.3 million $2.26 million 35.85%
Cruz (Ted) $1.8 million $565 thousand 31.12%
Why is there so much disparity? Fully 2/3rds of the Clinton's income in 2011 was from self-employment. When you have self-employment income, all of that income is subject to income tax and self-employment taxes. Meanwhile, $9 million of the Romney's income was from long-term capital gains and qualified dividends. So that $9 million wasn't taxed at the top marginal rate of 35% that year, but at the much more favorable rate of 15%. That saved the Romneys $1.8 million in federal income tax.
Almost all of Jeb Bush's 2011 income was from self-employment. And unlike the Romneys, whose itemized deductions of $4.6 million represented 34% of their income, the Bush tax return shows itemized deductions of $124,760 (1.9% of his income).
Favorable tax treatment of certain types of income and large itemized deductions are what drive the effective tax rate paid by the wealthiest Americans down from their top marginal rate. And in spite of the prevailing wisdom that those wealthiest paid a lot more tax in the 1950s, the effective tax rate history tells a different story.
As you can see, the effective tax rate paid by the top 1 percent is only 5.6% lower in 2014 than it was in the 1950s.
There are other issues involved as well. Let's look at the income, tax paid and effective rate from some 2005 tax returns of presidents and candidates:
Name Total Income Federal Tax Paid Effective Tax Rate
Bush Jr (Dubya) $739 thousand $188 thousand 25.41%
Cheney $8.8 million $530 thousand 6.00%
Clinton $18.3 million $5.6 million 30.44%
Trump $49.5 million $38.4 million 77.59%
Whoa there. Trump paid 77.59% of his income in federal tax? Based on the standard measurement of effective rate. But those numbers include his ability to claim a Net Operating Loss (NOL) of $103.2 million. Add that back in and his line entry looks like this:
Trump $152.7 million $38.4 million 25.16%.
It was that pesky Alternative Minimum Tax (AMT) that resulted in his NOL being added back into his income for the purpose of the AMT calculation. Without the AMT, there's a third view of that line:
Trump $49.5 million $7.17 million 14.48%
Trump $152.7 million $7.17 million 04.69%
As to why Dick Cheney and his wife paid such a low effective tax rate, their itemized deductions reduced their income of $8.8 million by $6.9 million. That allowed them to avoid tax on 78% of their income. Since the tax return they released did not include the page of itemized deductions, we'll never know what deductions they took.
A top marginal rate of 70% on income in excess of $10 million is meaningless without changes that ensure the effective tax rate those people pay goes up.
It's the effective rate. Period.
posted by me at 3:20 PM
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