Wednesday, September 19, 2012

The 47% solution

Say you’re a guy with a wife and a couple of kids. You got a healthy mortgage, give some to charity and have some other deductions. You’ve worked hard and as a result, you have been given raises. Now you’re making 50 grand. Good for you. And here’s the sweet part: because of things like the earned income tax credit, you pay no income taxes on your 50K of ordinary income. You’re in the 47% that Romney spoke of.

Now, that may come as a surprise to you, because you do pay payroll taxes on all of your income at about 15%. You can do the math: You’ve kicked out 7,500 dollars to pay for Social Security, and if you’re under 55, Romney and Ryan have a plan to screw you out of that, too. But the real thing that might just frost you is that you’re paying taxes on your income at a higher rate than Mitt Romney, who paid about 13 percent on his capital gains.

Were you paying attention? Did you notice that Romney doesn’t pay social security taxes? That’s because he doesn’t earn ordinary income. You got it! Mitt Romney is one of those guys – the 47% – who pay no income taxes. That’s the group that Romney was bashing for having an attitude of entitlement and the posture of a victim. You can see now why he is so upset about the way the press is handling him.

Now, I can imagine you saying something like: “Hey Big Mitch! Are you sure that all of Romney’s income doesn’t come from actually working, as opposed to clipping coupons?” And the answer is, well, it’s complicated. He told Newt Gingrich during a debate that if the capital gains tax were eliminated he would pay no tax, so, if we take him at his word, yes, he didn’t do a lick of work for his money, and therefore, why should he have to pay income tax?

But of course, that’s an over-simplification. There’s a thing that is called “carried interest” or just “carry” for short. Basically, it is a return on hedge funds paid to managers for managing. Say, for example, you have a job managing a car lot. You get paid every month, and you pay taxes, either payroll taxes, or income taxes or both. It’s a lot like that, except because you are a hedge fund manager who works on Wall Street and makes political donations in the 6 figures, you don’t pay payroll or income taxes on it. Instead, the carry is treated like capital gains. Go figure.

There’s another tidbit to be found in the candid camera take of Mitt Romney talking to wealthy political donors. Remember Senator Harry Reid said that Romney paid no income taxes? Turns out, he was right. And his source? That would be Mitt Romney.

I am not a tax accountant, but if you are, or you know one, show this blog to him or her, and ask if it is correct.

“… and tell ’em Big Mitch sent ya!”

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