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Week in Review: Romney's 15.9% tax rate

Republican presidential hopeful Mitt Romney.

Tess Vigeland: Let's start with a look back at the week that was -- and for that I'm joined by our own Nancy Marshall-Genzer from the Marketplace Washington bureau. Hey Nancy.

Nancy Marshall-Genzer: Hey Tess.

Vigeland: So I hope you didn't get stuck in any of the motorcades on Tuesday night around the Capitol.

Marshall-Genzer: I did not. I was home playing with my two-and-a-half-year-old boys.

Vigeland: Perfect thing to do on State of the Union night.

Marshall-Genzer: Absolutely. Then I stayed up late to watch it after I put them in bed.

Vigeland: I think the most interesting thing though is the State of the Union was almost eclipsed by the news on Tuesdya of Mitt Romney's tax return.

Marshall-Genzer: You know, it was really big news and there was a build-up to that news, because Romney, of course, didn't wanna release them, but he finally did.

Vigeland: Right.

Marshall-Genzer: Turns out Romney and his wife Anne paid a rate of 13.9 percent in 2010.

Vigeland: This is what's called the "effective rate," which means it's the total amount of federal tax that they paid proportionate to their income. Now, the big story has been this sounds relaly relaly really low and I bet a lot of people heard that news and wondered, "Hey, how can I get a rate like that?" So Nancy, how can I get a rate like that?

Marshall-Genzer: Remember, Romney doesn't actually have a job, right? So he's pretty much treated as a retiree, living off hsi investments, like his grandmother. Now, remmeber, the Romneys did pay a lot of money in taxes in 2010, about $3 million. But it was at this low rate for investment income. So Tess, as far as how you get to this lower rate, maybe you're thinking to yourself, "Hey, I'll just win a million dollars in the lotteyr, right?"

Vigeland: I'm thinkin' that's exactly what I'm thinkin' to myself.

Marshall-Genzer: Go out and buy a ticket!

Vigeland: Right.

Marshall-Genzer: I've got bad news for you Tess. Lottery winnings are treated liek earnings! So, if you won a million bucks, that would land you in the 35 percent tax bracket. I got that bad news from Stuart Ritter. He's a financial planner at T. Rowe Price.

Stuart Ritter: And when you get your lottery check, they don't even give it to you and have you report the taxes; they take the taxes right out of the top. So, not all of it would go to the 35 percent, but of the million, you'd probably clear $750,000.

Vigeland: But Nancy, I've always heard that lottery was taxed like a windfall, so they actually take out like half. But here we're saying 35 percent?

Marshall-Genzer: Well, depends how much you win, right? But as Stuart just said, if you won that million bucks, that would shoot you out into the 35 percent tax bracket. And you're probably still wondering why I haven't answered your question of how you can get into that 15 percent tax bracket.

Vigeland: Without winning the lottery.

Marshall-Genzer: Yes. The best thing to do is invest whatever money you uhave, OK? So if you did win that $750,000 from the lottery, you would invest that. Becuase income from investments is taxed at a flat 15 percent rate. Income from wages is taxed usually at a higher rate unless you don't make much money.

Vigeland: You know, I think what this generated this week Nancy is peopel thinking about what their tax rate is. And I wonder if sometimes if people overestimate what that is, that perhaps they think they're paying a higher rate than they actually do.

Marshall-Genzer: You know, actually, people do that all the time. And, Tess, this has to do with that effective tax rate that you mentioned when we first started talking. What's your favorite kind of cake?

Vigeland: Chocolate.

Marshall-Genzer: All right. Think of your tax bill as a chocolate layer cake with fudge frosting.

Vigeland: I like my taxes then!

Marshall-Genzer: Now you like yoru taxes!

Vigeland: I want more taxes!

Marshall-Genzer: You pay 10 percent on the bottom layer of your income, right? The next layer is the 15 percent layer and so on, until you get to the last $15,000 of your income. You pay a 28 percent rate on that. So your effective tax rate is the blend of what you paid on all those layers. So Tess, you hear people say at a party, "Oh, I'm in the 28 percent tax rate," what they don't realize is they only pay 28 percent on that top layer of their income. So their effective tax rate is much lower than that. Still, it is usually higher than the tax rate on income from investments. So save your pennies, buy that lottery ticket.

Vigeland: All right, Marketplace's Nancy Marshall-Genzer making me hungry and more educated. Thanks so much.

Marshall-Genzer: Enjoy the cake.

About the author

Nancy Marshall-Genzer is a senior reporter for Marketplace based in Washington, D.C. covering daily news.
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"Hey, how can I get a rate like that?"

1. Put some of your net worth at risk by buying equities. Keep in mind you might make nothing, or lose your a$$.

2. Keep in mind, as an investor, you are an owner in the companies you invested in. That means you're paying lots of taxes while you own those companies: Federal taxes, state taxes, local taxes, excise taxes, AND YES, half of the Social Security taxes for all your employees. You're great 15% tax rate only comes into play after you've paid all those other taxes. In other words, you're taxed twice.

Marketplace through its reporting and its guests continues to misconstrue the reasons for Romney's low effective tax rate. It has little to do with capital gains; it has everything to do with the treatment of hedge fund compensation, not as ordinary income as with doctors, lawyers, architects, manufacturers, etc but as "interest carried forward" which is taxed at the same rate as capital gains. $13 million of Romney's $20 million in income was "icf" which means that only $7 million of it was actually capital gains. A secondary issue is that his current investment income of $7 million is earned with investments purchased with compensation from Bain which was taxed at the 15% rate. He was able to invest more of his income because his tax rate on his compensation was lower. His "Tax Day" when he was no longer earning income to pay his taxes came much sooner than other taxpayers who earnings were taxed as ordinary income. Remember, his compensation was for his time, skill and knowledge, not a return on money he invested in Bain.

Finally, your story on NASA stated the space program gave us polarized sun glasses. Polarized lens were in common use well before NASA. In fact, they were issued to anti-aircraft gunners in an adjustable mode during WWII to allow them to track aircraft flying at them with the sun behind them.

“A lot of people heard that news and wondered, ‘Hey, how can I get a rate like that?’” Do you really think so? That’s not what I thought. I thought, “How is it that a corporate raider worth a quarter of a billion dollars has the gall to run for president on a pro-business, anti-government, anti-tax platform?” Answer? Because money buys political access, and government spending has been redirected from a goal of redistributing wealth and addressing issues of public concern to one of helping the rich get richer. Once again, the myth that tax savings produces an incentive for investment is being propagated (supply-side fairy tales). If it did, we wouldn’t be on the verge of financial collapse, nor would we rank among the highest in disparity of wealth and income of any country on the planet. What investment there has been in the past has been in the global economy, which translates into a disinvestment in America for most Americans.

“A lot of people heard that news and wondered, ‘Hey, how can I get a rate like that?’” Do you really think so? That’s not what I thought. I thought, “How is it that a corporate raider worth a quarter of a billion dollars has the gall to run for president on a pro-business, anti-government, anti-tax platform?” Answer? Because money buys political access, and government spending has been redirected from a goal of redistributing wealth and addressing issues of public concern to one of helping the rich get richer. Once again, the myth that tax savings produces an incentive for investment is being propagated (supply-side fairy tales). If it did, we wouldn’t be on the verge of financial collapse, nor would we rank among the highest in disparity of wealth and income of any country on the planet. What investment there has been in the past has been in the global economy, which translates into a disinvestment in America for most Americans.

Tess,
I would like to clarify a comment Nancy Marshall-Genzer made (1/27/2012 show) concerning taxes on investments, "Becuase income from investments is taxed at a flat 15 percent rate. Income from wages is taxed usually at a higher rate unless you don't make much money." I believe the only income from from investments that is taxed at a flat 15% are capital gains realized from the sale of those investments and qualified dividends. Interest and ordinary dividends from those investments is taxed at the invidual's ordinary income tax rate for their total income picture. This is a fine but important distinction, particularly if your listeners think they will be able to get an across the board 15% flat rate on all their investment income.
Dan Archibald

The story about the 15% tax rate was fun but we would have preferred to hear more factual information. Talking about winning big in the lottery is really not informative nor instructive for most investors. Maybe these would have been more informative for listeners/newer investors:

1) To get 15% tax rate an average investor must invest their after income tax money in an investment that yields long term capital gains.

2) Most people invest via a 401K or pretax plan through their employer. Such investments cannot benefit in any way from the 15% long term capital gains tax rate. 401 K/457/401A/TSA plans are normally pretax retirement savings plans that average workers use and they do not provide any method to restructure payouts under the 15% LTCG tax rate.

3) A Roth IRA using after tax money is limited in the amount that can be invested and there are limitations regarding the annual earnings that qualify a potential ROTH IRA investor.

4) Most working Americans will have a hard time saving enough after income tax money to derive significant/meaningful LTCG tax income benefits.

5) Thus the Romney preferential tax loophole is focused to benefit the well to do and not average Americans.

Please quit using the term "effective tax rate" since there is no such calculation other than this made up one. Taxes, even the 15% rates, are based on taxable income which is after allowable deductions such as charitable contributions. If you earn 1 million and give away half of that amount to charity, you are taxed at 35% of what you have left which would be $175,000. Your tax rate is 35%, not an effective tax rate of 17.5%.

Please use spellcheck, this hurts my eyes...

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