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IN DEFENSE OF MITT ROMNEY?S TAX RATE

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IN DEFENSE OF MITT ROMNEY?S TAX RATE

By now we have learned that Mr. Romney is allegedly paying an income tax rate that is half of the rate paid by Warren Buffett’s secretary, half the rate of Newt Gingrich, and half the rate of all the “working people of America.”  In defense of tax and economic education in the United States, which has suffered greatly over the last twenty-five years, permit me to disagree.

Mr. Romney is an investor.  He has taken his hard-“earned” (i.e., taxed at the higher rate) income of previous years and invested into businesses, with the intent of making a profit.  Americans everywhere do the same thing, as do union pension funds.  As an investor, he is a part-owner of the company.

When his company makes a profit, the company distributes a portion of the profit to each of the shareholders, according to the number of shares he owns.  However, before that happens, the profit is TAXED, at a rate of approximately 34% for many American companies.  Therefore Mr. Romney pays a 34% tax on his profits BEFORE THEY EVEN GET TO HIM.  Remember, dividends are paid from after-tax money; they are not tax deductible to corporations.

Only then does Mr. Romney take possession of his profits through dividends.  (Also remember that most businesses retain profit for future needs.  That profit too is taxed.)  The dividends are reported as income by Mr. Romney, and are then taxed at the “low rate” of 15%.  (This excludes any discussion of state income taxes, which are an additional burden.)

Now for the math:  Because of the tax at the corporate level, Mr. Romney only receives about two-thirds of his profit.  So he pays 34% at before he receives his dividend, then 15% on the two-thirds he does receive, or about 10% (15% times two-thirds).  So he ends up paying 44% of his profits back to the government in taxes, not just 15%.

Generally, when the government taxes income somewhere, it allows a tax deduction somewhere else.  If a bank pays interest income to someone, the interest income is taxed to the recipient and the bank is allowed an interest expense deduction.  When someone pays for tax preparation, she receives a tax deduction while the CPA pays income tax on the income earned.  Dividends and capital gains, however, do not have this offset.  As stated before, dividends are paid from after-tax profits.  Capital gains are created when someone sells an asset at a profit; however, the buyer does not take a tax deduction until HE sells it…and so on, and so on.

The tax rates implemented in 2001 were designed to address the inconsistency of double taxation on business profits.  Taxes are an inefficient way to redistribute wealth; studies show that the administration of government takes up to three-eighths of total tax receipts.  By now vilifying these principles is to fail to understand the American tax system and fail to understand the economic principle of keeping money in the pockets of the citizens.