Forecasts and Trends
By Gary D. Halbert
Marginal Tax Rates vs. Effective Tax Rates
With the Republican presidential primaries in full swing, we’ve seen a lot of attention
focused on the income tax rates paid by the candidates. In a debate earlier this month,
Mitt Romney, who is very wealthy, commented that he thought his income tax rate was
around 15%. This brought an outcry from the media that complained how it is unfair for a
multi-millionaire like Romney to pay taxes at a lower rate than average Americans.
I have received a number of questions from clients and readers on this very topic, so let
me try to explain how this can be. You have to understand the difference between the
marginal tax rate and the effective tax rate. Under our progressive tax system,
income is taxed at graduated rates. The current statutory income tax brackets range from
10% to 35%. An individual’s marginal tax rate refers to the portion of income that is
taxed at the highest tax rate ” not the rate for the entire amount of income earned.
[For the tax professionals and accountants in our audience, I should add that the marginal
rate is not just the statutory percentage but includes all credits, hurdle, phase outs and the
Alternative Minimum Tax that can cause the rate to be above or below the statutory tax
The effective tax rate, meanwhile, is the amount a taxpayer pays in taxes as a percentage
of total income. Here is an example: If you file your federal tax return as a single
taxpayer, had taxable income of $75,000, and paid $15,332 in federal income taxes, then
your marginal rate would be 28%, but your effective rate would be 20.4%. That lower
rate reflects the fact that you paid tax on portions of your income at the 10%, 15% and
25% rates, as well as the final portion at 28%.
The average effective federal tax rate for American taxpayers is 11%, according to an
analysis of 2009 IRS data by the Tax Foundation, a non-profit research organization. For
individuals with adjusted gross income of $50,000 or less, the average effective tax rate is
less than 5%, according to the Tax Foundation. The table below illustrates the average
effective tax rate paid by Americans at various income levels based on 2009 data from
In Romney’s case, the majority of his annual income is reportedly derived from his
investments that produce mainly capital gains, which are currently taxed at a flat rate of
15%. Under pressure, Romney released his 2010 tax return and estimates for 2011
recently, so we’ll know more details about how much he pays in taxes, and at what rates,
in the days just ahead.
Warren Buffet likes to complain that he pays a lower tax rate than his secretary, but his
situation is much like Romney’s. Most of Buffet’s income is in the form of capital gains
that currently enjoy the lower tax rate of 15%.
The difference in marginal rates and effective rates can be confusing because the media
throws out tax rates but they rarely define which rate they’re referring to. Hopefully, this
Millionaires: Tax the Rich, But Not Us
Most millionaires say they think the rich should pay more taxes, but when it comes to
them individually, they disagree. There are a couple of reasons for this. PNC Financial
Services Group, the sixth largest US bank, recently surveyed 555 millionaires (those with
investable assets of $1 million or more, excluding real estate) across America.
Surprisingly, 71% said they believe the wealthy should pay more in taxes and give more
to charity. But in the same survey, 49% said that the higher tax rate should not apply to
them but only to super-rich types like Warren Buffett.
It is obvious that almost half (49%) of the millionaires surveyed don’t consider
themselves wealthy. Unfortunately, the survey didn’t ask the respondents to identify just
what level of wealth should trigger the higher tax rates that 71% said they favor.
At the same time, 41% said that if their tax rates were increased, they would change their
investment strategy, presumably to try and avoid paying more taxes “ surprise, surprise!
24% said they would reduce their commitments to charities if their taxes were increased.
What does this tell us? A lot of wealthy people like to say they’re in favor of higher taxes
on the rich because it feels good and is politically correct. But when it comes down to
actually paying more, almost half think the higher tax rate shouldn’t apply to them. The
other thing it tells us is that a lot of millionaires honestly don’t think they’re wealthy by
Finally, a new Rasmussen poll taken last week found that 47% of likely voters would
support a presidential candidate who promises to raise taxes only on the rich, while only
36% said they would support a candidate who opposes all tax increases. Another 18%
weren’t sure. President Obama’s message of higher taxes on the rich is resonating, sadly.
Unfortunately, Obama’s definition of rich is families making over $250,000 a year.
[Dan’s Comment: If you have a million dollars of equity in real estate or whatever,
you’ll soon be included in Obama’s definition of rich!]
Gary D. Halbert is the president and chairman of Profutures, Inc. Subscription rates for
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