Reminder: No one knows what their tax burden is
There will be much discussion of Mitt Romney’s 2011 tax returns over the weekend. One piece of informed analysis I can offer immediately is that Romney paid a lot more in taxes last year that I did. It’s not really even close. Romney paid $1.94 million in federal taxes. I paid way less than half that much.
The point of contention in all the write-ups will be how Romney’s effective tax rate compares to other people’s tax rates. Many of these analyses will try swapping in nominal tax rates for average Americans, comparing them to Romney’s effective rate. But even the comparison of effective rates is a bit silly, and it highlights an essential flaw in the way we think about income, taxes, and what constitutes paying a “fair share” of the burden of government.
Why don’t we talk about how much money Romney actually paid in taxes, $1.94 million? How does that compare to the average American’s tax burden?
That question is nearly impossible to answer, for two reasons: there’s really no way to figure an average American tax burden, and nobody – from Mitt Romney, to me and you – knows how much they really pay in taxes.
A big part of the reason we hear so much ranting about “effective tax rates” is that average or median amounts of the actual tax burden are so difficult to calculate. One of the more thorough, but concise, discussions of the topic was published by the Cato Institute in 1992. Warning: it’s still a long, dense read.
You’ve got to consider how different people claim different tax deductions. You have to factor in regional differences in state and local taxation. And you have to consider a huge number of indirect and hidden taxes, some of which are completely invisible to consumers, because they’re built into the price of goods and services. “For most Americans, tallying all the various taxes that they pay to all levels of government is a hopeless tax,” concluded the Cato Institute. “Americans pay excise taxes, sales taxes, income taxes, and payroll taxes.” The task has not grown any easier since 1992.
That all applies to Mitt Romney, too, by the way. He did not pay only $1.94 million in taxes in 2011. He paid a hell of a lot more than that. He is no more responsible for tracking all of his indirect taxes than you are. It would probably be harder for him, because he spends more money, and he moves around a lot on the campaign trail, so he spends it in many different places.
Even if you could extract all of the data necessary to figure up the “average American tax burden,” you’d have to decide who average Americans are. Not to put too fine a point on it, but as you may have heard recently, 47 percent of us aren’t paying federal income taxes at all. Those people pay lots of other taxes, but as with any other equation, the calculation of an average federal burden would go haywire as soon as all those zeroes were introduced.
Romney’s $1.94 million in federal tax liability is probably hundreds of times the size of an “average” American’s federal taxes. Even using the most absurdly generous and simplistic calculation, the federal tax burden on the median family income in 2011 was about $7000, without any deductions factored in. Romney paid 280 times that amount. Why should one person carry the burden of hundreds of his fellow citizens? How is that “fair” – or, more to the point, how could it possibly not be “fair enough?”
But there’s one more factor to consider: time. This is a four-dimensional calculation. You see, a great deal of Romney’s income in 2011 came from capital gains, which are taxed well below the top marginal income tax rate… but that money has already been taxed once already. (More than once, according to some analysts.)
When the Romney campaign published tax summary information for the last 20 years today, they were doing more than merely demonstrating that Romney’s rates averaged 20.2 percent over that period, to make his 14.1 percent effective rate in 2011 look better in context. His income and taxes paid in prior years has a direct bearing on his income from 2011. That’s broadly true of almost everyone – if nothing else, you probably have some tax-deferred savings in your retirement account. But it’s particularly true of people who make large-scale investments. And we want people to make large-scale investments, don’t we?
So comparing Romney’s effective tax rates to anyone else’s – from a lower-income millionaire like Barack Obama, to the relative modesty of vice-presidential nominee Paul Ryan’s $65,000 in tax paid on $323,416 in income – is almost meaningless. It is intellectually dishonest to invest it with deeper meaning, based upon information that is almost impossible to compute, using equations that contain a nearly infinite range of variables.
And the impossibility of figuring out how much anyone really pays in taxes, from a millionaire investor to a hot-dog vendor, should bother us a lot more than it does.