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Rich People’s Taxes…

January 21, 2012

Both Warren Buffet and Mitt Romney have famously stated their “tax rate” is about 15%, then the politicians became apoplectic and demanded to further tax the rich.

Well – do the math – 15% is about the correct rate…

Before you call me an aristocratic stooge, you must remember that I am a math-guy – I live with numbers.  If you want the Mitt to pay about the same taxes as those of us getting W2’s – you need to understand where the money comes from – and the fact it has already been hit with a sizable tax.

First – for Joe programmer, let’s keep it simple and assume that we are talking about the 28% tax bracket (which is for a family income of $142 – 217K).  We will also bypass all the details about how tax ‘brackets’ work, and just assume the simplest math (laddering the brackets typically just confuse normal people…).
In short, Joe will think that his money is taxed at 28%.
(Realistically – Joe programmer’s total tax burden will be about 10% because of the way brackets work and his accountant is not a total dope.)
Now – for Jane rich-person with her millions coming from dividends.

And, to keep it simple, let’s say all her “income” comes from dividends.  No need to confuse the issue with her W2 and mix of LT and ST capital gains…

Since Jane’s money is from dividends, it actually comes from a corporate profit – the money left over after all expenses.  Assuming this company employs Joe above, his wage (and its W2 taxes) are unrecoverable expenses to the company.  What this company does and its capital efficiency are unimportant for this calculation, let’s just assume that this company has a total profit of $15Million.  This is the money left over after all the expenses like Joe and the cost-of-goods-sold.
This $15Million profit, is then the income of the corporation, which is then taxed at  38% (unless you have a cadre of lawyers like General Electric who magically weave a story to set this to 0%).
Regardless about GE, let’s assume this profit (typically called ‘corporate income’) is now taxed at 38%, leaving $9.3Million left to distribute amongst the shareholders (or re-invest in the company).

Finally – Jane gets her millions in dividend money, and then pays another 15% on that money.
In short – that money has been taxed  at 53% (38 + 15).

Welcome to the real world baby – the rich DO pay a lot in taxes.

Now – a separate discussion – should the corporate tax rate be 38% or zero or ?
After all, that is the money used to re-invest into the company and create more wealth….

Update (3-Feb-2012)…
We are now hearing that much of Mitt Romney’s ‘income’ was through “carried interest” – OY !
I never liked the tax rules for “carried interest” – that always seemed like a scam to me.
Soooo – my thoughts are still valid for income from dividends, but I will have to figure out what to write about income from “carried interest”.

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