Real tax rates

Written by Susan Mannella on .

Since Mitt Romney has released his tax returns, there has been substantial discussion over his tax rate of less than 15 percent. This is an effective tax rate -- taking the $3 million he paid in taxes and dividing that into his income of $21 million.


A Jan. 25 article by The New York Times, "Romney's Tax Returns Show His Holdings and Donations," stated that the tax rate Mr. Romney pays is typical of a household earning about $80,000.

Here is the math on that household (assume a married couple with two kids): $80,000 earned income, standard deduction in 2011 of $11,600 and personal exemptions of $14,800 ($3,700 per person times four). This takes their taxable income to $53,600. The total tax due is $7,190 or an effective tax rate of 8.99 percent. Now, this couple can also claim the child tax credit of $1,000 per child, lowering their taxes to $5,190 -- now an effective tax rate of 6.49 percent.

FYI, this household could lower their taxes if they can itemize the deductions or if they contribute to a retirement plan.

If we are going to have a conversation abut tax rates, let's make sure we are comparing apples to apples.

I am not for or against Mr. Romney. I simply want people to understand a little about tax rates and the difference between marginal and effective tax rates.

Lastly, I find it hard to begrudge someone who paid $3 million in federal taxes and gave over $3 million to charities.


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