GOP presidential candidate Mitt Romney rather sheepishly admitted during a debate last week in South Carolina that he pays an income rate somewhere around 15 percent because most of his income is derived from capital gains on long-term investments.
Romney's tax returns show he made $21.7 million in 2010, and because of various legal charitable deductions and exemptions paid $3 million in taxes, an effective tax rate of 13.9 percent.
That led to the assertion by some of his opponents and several media outlets that Romney, a rich man with a fortune reported to be north of $250 million, paid a federal income tax rate lower than most working Americans.
The claim made great copy and is sure to incite populist fury. Unfortunately, at least according to the Internal Revenue Service, it's not true. The vast majority of Americans pay a rate of 15 percent or less in federal income taxes.
The U.S. tax code is complicated. Very simply, Americans pay a graduated income tax on most sources of income. The more you earn, the more you pay. But it's more complicated than that. Each taxpayer pays no taxes on a certain portion of their income, and pays a variety of rates on different portions of their nonexempt ordinary taxable income that correspond to the various tax brackets set up by the IRS.
In 2011, a married couple filing jointly paid 10 percent on the first $17,000 of their nonexempt, taxable income; plus 15 percent on the portion between $17,000 and $69,000; plus 25 percent on the portion between $69,000 and $139,350; plus ... you get the idea. The top rate is 35 percent, and it kicked in when a couple's income reached $379,150.
The highest rate paid, charged on the last dollar of income, is the taxpayer's marginal tax rate, the rate always discussed in the media. The actual effective rate anyone pays is less -- sometimes a lot less. The average effective rate is about 8 percent.
Capital gains from certain long-term investments are taxed at 15 percent even if other income, described by the IRS as ordinary income, is taxed at a greater rate. Had all of Romney's income been in the form of a salary, he most certainly would have paid a higher rate.
In 2009, the latest year for which IRS statistics are available, there were 104.1 million individual income tax returns filed. Of that total, 76.4 million tax filers had a marginal rate of 15 percent or less, including 7.3 million who paid the capital gains rate. About 27 million paid a marginal rate of 10 percent or less.
We find little in Romney's personal tax situation to get worked up about. The real travesty is that our tax code is so complicated that even those of us with more modest incomes don't know what rate we pay, and must seek professional assistance to complete our annual returns.