Friday, April 13, 2012

Obama's effective tax rate

I had actually reviewed Obama's 2010 tax return recently, so I quickly latched onto his 2011 return when it came out today. Some interesting tidbits in there.
 
First, his 2011 return completely takes the wind out of the sails of his claims that "we need to change our tax code so that people like me, and an awful lot of Members of Congress, pay our fair share of taxes. Tax reform should follow the Buffett rule: If you make more than $1 million a year, you should not pay less than 30 percent in taxes." In 2010 he made more that $1 million, but in 2011 he only made about $800K ($844,585 total income, $789,674 adjusted gross income, and $496,376 taxable income), so his infamous "Buffett Rule" would NOT apply to him. Let's see if he adjusts his stump speeches accordingly from here on.
 
Second, the White House referred to his 20.5% effective tax rate, sort of implying that it was lower than a typical middle-class tax rate, which is completely false. I read recently that the median effective tax rate for the middle 20% of U.S. taxpayers is 13.3%, WELL below Obama's effective rate. More wind taken out of the sails.
 
Obama's effective tax rate was reduced significantly primarily due to a significant level of charitable contribution deductions ($172K). Without the "tax break" for those deductions, I calculate that his effective tax rate would have been 28.2%, still WELL above the tax rate of an average American without the high level of charitable contributions. I calculated that he saved $60K on taxes as a result of the charitable contribution deductions. Incidentally, Romney's 2010 effective rate was low in large part due to very large charitable contributions.
 
Every penny Obama made over $379,150 was taxed at a marginal tax rate of 35%. For a middle-class family making less than $100,000 (that's most people), their highest marginal tax rate is only 25%. No sign of any need for a "Buffett Rule" there.
 
This 30% number in "The Buffett Rule" seems rather arbitrary and completely unrelated to this separate issue of what a millionaire makes vs. the average middle-class worker.
 
For one important thing, it completely muddies the distinction between marginal rate and effective rate. "Bait and switch" is a sleazy form of rhetoric.
 
Even more important, the proposed rule doesn't even bother mentioning the whole point of the 15% capital gains rate: to encourage investment that will help grow the economy. That would be a terrible loss to both the economy and the government itself.
 
And what exactly do people think will happen to charitable contributions if the government starts telling people that if they take a tax deduction for charity their tax rate on the rest of their income will GO UP?!
 
That was actually a rhetorical question because there is absolutely ZERO chance that "The Buffett Rule" will get passed in Congress, so there isn't actually any need for anybody to worry about consequences.
-- Jack Krupansky

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