Tax rate: Romney vs. the average American family

Last Friday, presidential candidate Mitt Romney released his 2011 income-tax return information showing that he and his wife Ann paid a 14.1 percent tax rate. The report shows Romney paid $1.9 million in taxes on $13.7 million in income. The Seattle Times reports that most of the $13.7 million came from his investments. He also donated $4 million to charity, but deducted $2.25 million to keep his tax bill above 13 percent.

Romney defended his tax rates Sunday on CBS’ “60 Minutes.” Romney told CBS’ Scott Pelley it is fair for him to pay a lower effective rate than someone with low income because his money comes from capital gains.

“Now you made, on your investments, personally, about $20 million last year,” Pelley said during the aired report. “And you paid 14 percent in federal taxes. That’s the capital gains rate. Is that fair to the guy who makes $50,000 and paid a higher rate than you did?”

“It is a low rate,” Romney said in response. “And one of the reasons why the capital gains tax rate is lower is because capital has already been taxed once at the corporate level, as high as 35 percent.”

The Huffington Post’s Zach Carter reported that Romney’s income was $13,696,951 in 2011, and he paid $1,935,708 in taxes. Romney’s income for the year was more than 263 times larger than the U.S. median household income of $51,914.

In an article in USA Today, author Sandra Block says that while tax rates may range from 10 percent to 35 percent, Romney’s 14.1 percent seems very low. However, she points out there is a difference between a taxpayer’s effective tax rate and his marginal tax rate, also referred to as a tax bracket.

Each dollar in an income is not equally taxed. Say Joe Taxpayer earns $85,000 per year, is married, and files jointly with his wife. According to Forbes, the government taxes income at a 25 percent rate in his bracket. It’s very easy to think that Mr. Taxpayer would pay $21,250 in taxes on his $85,000 income, but that’s not how the tax code works.

When the Titanic sank, it sank because water filled up one watertight, bulkheaded compartment and spilled to the next, which then filled up in turn. When that compartment filled up, the water spilled into the next, and so on until there was so much water in the boat that it went under. Taxes are similar.

Joe Taxpayer pays 10 percent on his first $17,500, or $1,750. That first income compartment, or bracket, fills up, the government takes its cut, and then moves on to the next. In the next bracket from $17,500 to $75,700, the government will take 15 cents for every dollar, or a 15 percent rate. On that $53,200 Joe Taxpayer pays $7,980 in taxes. But Joe Taxpayer’s not done yet. He makes $85,000, so the next compartment, or bracket, starts to fill up with what remains of his income. In this bracket, the government takes 25 cents for every dollar. Joe Taxpayer fills this bracket with $9,300, the amount beyond $75,700 he has earned, and is taxed $2,325.

So, add it up. $1,750 plus $7,980 plus $2,325 is equal to $12,055, which effectively is 14.18 percent of Mr. Taxpayer’s $85,000 income and not the 25 percent one might suppose he would pay. It’s also important to note that this is how much Mr. Taxpayer would pay before accounting for the standard tax deductions and itemizations, which reduce everyone’s taxes.

Romney was referring to his effective tax rate.

“The average effective federal tax rate for American taxpayers is 11 percent, according to an analysis of 2009 IRS data by the Tax Foundation, a non-profit research organization. For individuals with adjusted gross income of $50,000 or less, the average effective tax rate is less than 5 percent, according to the Tax Foundation,” Block writes.

According to the Tax Foundation, the following is the average tax rate for U.S. taxpayers based on adjusted gross income.

• Income between $50,000-$74,999 – average tax rate is 7 percent
• Income between $75,000-$99,999 – average tax rate is 8 percent
• Income between $100,000 – $199,999 – average tax rate is 12 percent
• Income between $200,000 to $499,999 – average tax rate is 19 percent
• Income more than $1 million – average tax rate of 25 percent.

Block writes that while Romney’s effective tax rate is higher than the national average, it’s lower than the percentage paid by most high-income taxpayers.

Addtionally, ABC News reported Mitt Romney puts much of his money into trusts that allow him to avoid estate and gift taxes. The report says money in these trusts is meant to be a gift to his children and grandchildren, but according to Bloomberg News, they do not legally qualify as an inheritance and are largely tax free.

These trusts do not count towards Romney’s reported net worth of $250 million dollars. They have also grown extraordinarily quickly, earning a 1000 percent return on the sale of stocks in tech advertising company DoubleClick.

How much do you think Romney should pay in taxes?

Courtnie Erickson is a Utah State University graduate and a technology guru. Email her at courtnie.erickson@gmail.com.

Landon Hemsley is the project lead for FamilyNews.com and a web producer for Deseret Digital Media.