The release of Mitt Romney's tax returns, which indicate that he
paid an average tax rate of 14 percent after deductions, has once again
prompted a great deal of confusion over marginal and average tax rates.
For a moment, let's set aside the issue that most of Mr. Romney's income
is in the form of capital gains and dividends, which are taxed at 15
percent rather than at the highest marginal rate of 35 percent, and look
at the difference between marginal and average (or effective) tax
rates.
Our income tax system is progressive, meaning we pay higher tax rates
as our income gets higher. As the table below shows, there are six tax
brackets for different bands of income. The "marginal" rate refers to
the tax rate that is applied on that band of income.
Say, for instance, our income is $120,000. This would put us in the
25 percent bracket. If the U.S. had a flat rate tax system (and no
deduction), we would pay 25 percent of $120,000 in tax, or $30,000.
Married Filing Jointly
|
||
Marginal
|
Tax
Brackets
|
Tax Brackets
|
Tax Rate
|
Over
|
But Not Over
|
10%
|
$0
|
$17,000
|
15%
|
$17,000
|
$69,000
|
25%
|
$69,000
|
$139,350
|
28%
|
$139,350
|
$212,300
|
33%
|
$212,300
|
$379,150
|
38%
|
$379,150
|
-
|
However, under our marginal tax system we pay 10 percent on the first
$17,000, or $1,700. We then pay 15 percent on the next band of income
up to $69,000, or $7,800. We then pay 25 percent on the marginal amount
over $69,000, for another $12,750 in taxes. When we total the taxes paid
on these three bands of income it comes to $22,250, for an average (or
effective) tax rate of 18.5 percent.
Of course, in our simplified example we have not taken account of all
the exemptions, credits, and deductions that are available to us. These
deductions reduce our taxable income. So instead of paying taxes on
$120,000, the deductions for our children, mortgage, and charitable
contributions could easily reduce our taxable income well below $90,000.
At this taxable income we would owe a total of $14,750, for an average
rate of about 12 percent.
Millionaires go through the same process, meaning they pay 10 percent
on the first band of income, 15 percent on the next band, and so forth.
As the chart below shows, based on the most recent IRS data for 2009,
the average tax rate (after deductions) paid by all Americans is 11
percent. It is also clear that millionaires pay an average of 25
percent, while virtually every taxpayer earning under $100,000 pays an
average rate of no more than 8 percent of their income in taxes. [Click here for more detail on the chart's data.)
There are roughly 123 million taxpayers who earn under $100,000, or
about 88 percent of the 140 million Americans who filed a tax return in
2009. In other words, 88 percent of all taxpayers pay 8 percent or less
of their income in income taxes.
Which gets us back to Mitt Romney's effective tax rate of 14 percent,
after deductions. As the chart shows, this rate is still higher than
the average rate paid by taxpayers earning up to $200,000. There are
about 136 million taxpayers who have adjusted gross incomes less than
$200,000, or 97 percent of all taxpayers. So even with an average tax
rate of 14 percent, Romney paid a higher average rate than 97 percent of
his fellow Americans.
How does Romney's effective tax rate compare with other Americans? The average effective tax rate
of American taxpayers is 11% on adjusted gross income, according to an
analysis by the non-partisan Tax Foundation. Millionaires pay about
about 25%, the foundation says.
http://content.usatoday.com/communities/onpolitics/post/2012/01/mitt-romney-releases-taxes-/1#.T4oTx_nPrxF
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