Friday, September 21, 2012

Effective tax rate comparison

As noted in earlier posts, I am a bit reluctant to use the effective tax rate number in discussing Romney's tax returns because of what it leaves out, namely losses and deductions that may have significantly reduced his adjusted gross income (AGI) in some years, and that were not necessarily plain vanilla true economic losses.  But let's play the game anyway, and compare Romney to a moderate-income individual.

Say you were married with two children and had $60,000 of AGI in 2011, all of it wages.  You would thus have about $34,000 of taxable income after taking the standard deduction and personal exemptions. You’d pay about $4,250 of income tax. But you would also pay $4,590 of payroll taxes, at the 7.65 percent rate (counting the employee share only). So that would add up to about $8,840 of income plus payroll taxes on $60,000 of AGI, for an effective tax rate of about 14.7 percent.

Romney, by contrast, paid a 14.1 effective tax rate for 2011.  True, he doesn’t include payroll taxes in his effective rate computation. But for him they are trivial given the wage cap plus the fact that the payroll tax doesn’t apply to his capital gains and investment income.

3 comments:

sam said...

Why are you trying to include payroll taxes?

Daniel Shaviro said...

Because they are a significant component of what lower-income people pay. Note that one could argue for also including the employer share of the payroll tax (likely to have the same incidence, on the worker). Of course, payroll taxes also earn future benefits, but if we are taking a multi-year perspective, we shouldn't be focusing on taxes paid in one year anyway.

Calvin Brock said...

As noted in earlier posts, I am a bit reluctant to use the effective tax rate number in discussing Romney's tax returns because of what it leaves out, namely losses and deductions that may have significantly reduced his adjusted gross income in some years. Matawan Tax Preparer