There's been quite a lot of news coverage on what Presidential candidates pay in income tax. This got me to thinking about what I pay in taxes, not because I don't like paying taxes. I really do enjoy it. My money paves the roads I drive on. It makes the skies safe when I fly (it also pays the salaries of the sometimes surly TSA agents). It provides affordable education to the nation's students, and it provides a little financial security and healthcare to seniors. These are a few of my favorite things.
Mitt Romney says that his effective tax rate is about 15% while Newt Gingrich's tax returns shows his is 32%. Calculating the effective tax rate is easy, but before I cover that, let's explore the federal tax rates for 2011. Here are the federal tax rates for 2011.
I remember an urban myth about these tax rates. I haven't heard it recently so maybe this is one myth that has finally died. The myth says that if a person was near the top of one tax bracket and got a raise that bumped that person into the next bracket, the person would end up taking home less pay than before. But that's not how these brackets work. UPDATE: USA Today published an article on Sept. 2, 2011 that contained this error.
Let me illustrate. Suppose a single woman earns $34,100 in 2011. I mean for this amount to represent her taxable income; basically, taxable income is your income minus personal exemptions and deductions. The first $8,500 is taxed at 10%, so she pays $850 to the IRS. She is taxed at 15% for only the difference between $34,100 and $8,500. So, the tax on $25,600 is $3,840. Her total tax liability is then $4,690.
To find her effective tax rate is really simple. Take the total amount of taxes paid and divide by her taxable income. Here, $4,690/$34,100 = 0.138 = 13.8%.
Now suppose she gets a raise (in this economy?), and her 2012 taxable income rises to $35,700. The 2012 tax brackets have been inflation adjusted.
So next year she can expect to pay $870 (10%) on $8,700, $3,997.50 (15%) on $26,650, and $87.50 on $350. Her 2012 taxes will then be $4954.50, and her effective tax rate will be $4954.50/$35,700 = 0.139 = 13.9%
According to my 2010 return, my effective tax rate was 19.1%.
With all the talk about the 99% and the 1%, I wonder where I am. I earn a 'nice dime.' I found a % calculator on the Kiplinger website. Kiplinger is a financial advice and forecast business. It figures that I'm in the top 10% of American wage earners.
So I played around with it. To be in the top 5%, you need an income of $175,000. The 1%? $350,000.
When I was much younger, I would tell people that I wanted to earn a comfortable living. They'd asked what comfortable was. The smartass that I am replied that if I could lose half of my income and still be comfortable, that was a comfortable living. If I earned $350,000 and lost half of that, could I still be comfortable?
Wouldn't I like to try!
[N.B. Here are the tax brackets from 1919 to 2011.]