http://www.forbes.comMitt Romney Paid 30%, Not 13% In Federal Income Taxes
“Properly calculated, my tax rate was about 30%.”
There are two reasons that the Romneys’ tax bill is below 15%. According to their 2010 tax return (the latest available), Mr. and Mrs. Romney reduced their taxable income by the $3 million they gave to charities.
The second and most important reason is the majority of the Romneys’ income is taxed twice – first at the corporate level, and a second time when they report it on their personal income tax return.
In the case of the Romneys, it was taxed at 35%, the top marginal personal income tax rate.
The Romneys also reported $4.9 million in ordinary dividends, of which $3.3 million qualified for the 15% tax rate. Unlike interest payments, corporations may not deduct dividends from their income. Dividend income therefore is taxed twice, first at the corporate level, and then again when it is reported on an individual’s personal income tax return.
A rigorous economic analysis would use the top marginal tax rate because that is the rate that affects economic decisions. However, for the purpose of this analysis, a reasonable estimate would use the average U.S. corporate tax rate which, over longer periods of time, has been 25%.
Based on a 25% tax rate, for every $133 a corporation earned, it had to first pay $33 in federal income taxes before it could distribute $100 in dividends. Next, on every $100 of dividend income received, the Romneys paid an additional $15 in taxes. The combined tax of $48 totals out to a 36% rate on dividend income ($48/$133), which approximates the top personal income rate imposed on interest income.
Far from being a tax preference for the rich, the 15% tax rate on qualified dividends simply adjusts for the double taxation of dividends. A proper calculation would therefore add to the Romneys’ income and tax payments the amount of taxes paid at the corporate level on the dividend income they received.
It is not clear if all of the $4.9 million of dividend income reported on the Romney’s tax return, or if only the $3.3 million of dividends that qualify for the lower 15% tax rates, were subject to this double tax on dividends. To avoid over-stating the case, we will use the lower, $3.3 million of dividend income to make the adjustment for the double tax.
Using this amount and the 25% corporate tax rate implies that the Romney’s adjusted total pre-tax dividend income and total tax liabilities should each be increased by $1.1 million to $4.4 million. That would increase the Romney’s total tax bill to $4.1 million, or just below 18% of their now higher total income. Interestingly, that is virtually the same as President and Mrs. Obama’s average federal income tax rate.
But, the adjustments do not stop there. The tax on capital gains, too, is a double tax. To see this point, imagine a 25% corporate tax rate were imposed where it had not existed.
In such a case, the owners’ share of future profits would fall by one-fourth, to $75 on every $100 of profits from $100. All else the same, the value of the asset, which reflects the discounted present value of all future after-tax profits, also would be expected to fall by one-fourth. In the same way, the capital gains realized by the Romneys have been reduced by the 25% federal corporate income tax on the implied increase in future profits.
Thus, the Romney’s total income and taxes paid must also be adjusted up by 33% (1.33-(.25*1.33)=1) of the amount of their $12.6 million in capital gains income, or $4.2 million. After this adjustment, the Romney’s “Adjusted Total Income” is $27.0 million, and their “Adjusted Total Federal Income Tax Payments” are $8.3 million, $5.3 million more than reported on their tax return and 30.7% of their Adjusted Total Income.
Maybe President Obama should paid his fair share... instead of taking the foreign tax credit? or stop misleading the people..