 It turns out that when it comes to taxes, at
least, Ms. Colum, was mostly—but not entirely—right. To see why,
let’s take a quick trip through the tax returns of Newt
Gingrich, Mitt Romney and their spouses.
Admit it: Peeking at a celebrity’s tax return is more than a
little voyeuristic. But get beyond the sheer prurience of the
exercise and the Romney and Gingrich returns tell us a lot about
the way those with incomes of $1 million or more are taxed, and
how they structure their lives to minimize taxes. But mostly,
they tell us that all those who make $1 million a year are not
alike. And most of them are surprisingly like the rest of us,
only more so.
Gingrich is typical. He made more than $3 million in 2010—mostly
through distributions from an S Corporation. This allowed him to
avoid double-taxation (since the S Corp is a pass-through entity
that pays no tax). He also used this device to reduce his
Medicare payroll tax.
But of his $3.1 million in income, only about $35,000 came from
investments, and the rest was taxed at ordinary income
rates—much of it at the top rate of 35 percent. It is no wonder
that he paid close to $1 million in income taxes–an effective
rate of about 32 percent.
Despite the rhetoric coming from President Obama and the claims
of Buffett and others, that is not at all unusual. Of the
slightly more than 400,000 households making $1 million-plus,
the vast majority make most of their income from wages or
distributions from pass-throughs, and not from investments.
Think entrepreneurs, doctors, lawyers, movie stars, and
professional athletes.
As my Tax Policy Center colleague Bob Williams has noted in
TaxVox, even among those in the more rarified top 0.1 percent of
the earnings distribution (households making at least $2.5
million) fewer than 15 percent make more than two-thirds of
their money from investments. Perhaps surprisingly, more than
half make less than 10 percent.
In 2011, those making $1 million or more paid an average
effective income tax rate of about 19 percent of total cash
income. If you want to compare the tax they pay to their
adjusted gross income (the smaller amount that appears on a tax
return), it would be closer to 24 percent.
Of the $21,646,507 Romney reported on his 1040, $20,792,324 was
investment income. And most was taxed at the 15 percent rate
reserved for most dividends and long-term capital gains. Romney
also gave away almost $3 million in charitable gifts (big
contributions such as this are common—through hardly universal–
among those making that kind of money). As a result, his
effective income tax rate was a Buffett-like 13.8 percent.
Romney’s returns paint a picture of a man who was enormously
successful in his business career (good for him) and who has,
with the help of lawyers and accountants, carefully structured
his income in a way that minimizes his tax liability. The
result: a 203-page return and a very low effective tax rate.
If that offends you, don’t blame Romney. Blame the politicians
who created this mess of a tax code. And remember that despite
what Buffett and Obama say– and you might think–many high-income
people do pay a bigger share of their income in taxes than their
secretaries. |
