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Was reading an article in a left wing paper about the Romney tax return. Once you get through how the author of the article tries to shock you with the numbers, you begin to read the comments.

It is amazing how stupid a lot of people are on taxes, and how the extremely wealthy earned their money. Unfortunately, it’s easy to demagogue the big numbers and the tax rates. But reading what’s behind those numbers is wonky and something that most people don’t have the time or inclination to try and understand. For many, it’s easier to let envy bubble up and push it off rather than figure out how Romney really made his money.

To begin to comprehend, you have to know there are tax rates and there are real tax rates. There is the headline rate that everyone pays, and then there is the effective tax rate which is the true tax on your income.

Because American tax rates are progressive, you don’t pay the same amount of tax on each dollar of income. As you get into higher income brackets, you pay higher tax on each dollar earned. This is called an increase in tax on every marginal dollar. It wouldn’t surprise me if John Kerry paid less than or equal to Romney when it came to effective tax rates.

Here is some quick and dirty math:
Suppose one makes \$20,000 in a year and is taxed under the a progressive system. If you make 10g/yr, you pay 10%. Make 20g/yr, pay 25%. This person pays \$1000 (10%) of the first \$10,000 and 2500 (25%) of the second \$10,000. The total tax liability is \$3500, which when divided by the \$20,000 of income and multiplied 100, is found to have an effective tax rate of 17.5%.

But wait..I thought we were soaking the rich guys by having them pay more? Au contraire. That’s why incentives in the American tax code are so screwed up. We should be flat taxing everyone at 15% with no deductions.

The effective rate is always lower than the headline rate. Even if you are in the 35% tax bracket, you rarely pay that headline rate in tax. Also, because you take deductions for charity, mortgages and all the other sundry items you are allowed to deduct, your actual taxable income is generally less than your headline income. That’s one of the reasons why an AMT is so pernicious.

In Romney’s case, he paid a higher effective tax rate than 60% of all Americans.

When you read the comments, you see the misinformed trolls are out in force.

chitownrox at 4:03 AM January 24, 2012
\$42.5 million in income translates to roughly
\$60k a day, more than most Americans make in A YEAR. There’s rich, and then there’s ridiculously rich. Especially when your (Romney) vast wealth has come from firing people and bankrupting companies at a profit.

Totally false on the bankrupting companies comment. Private equity doesn’t bankrupt companies. In fact, when PE firms are successful they wind up creating a lot of jobs and value. Romney helped companies like Staples and Sports Authority grow into huge companies.

ronald214 at 5:36 AM January 24, 2012
Romney did not “earn” his wealth. He inherited it. There is nothing wrong with being born wealthy, but to be born on third base and thinking he hit a triple are two differnt things. Romney used his inheritance to buy companies that were vunerable to takeover.

This isn’t true. Romney wasn’t born poor, he was wealthy. But he did earn a lot of money on his own by taking quite a bit of risk. Bill Gates was born wealthy too. He took a lot of risk and made a lot of money as well. There are plenty of other Americans that were born wealthy, took risk and then added to their fortune. There are a lot of stories of wealthy Americans squandering family fortunes too. The important thing to note is that just because you are born poor or wealthy in America doesn’t mean you are guaranteed to stay there. There is a lot of income mobility in our country-especially when compared to every other country in the world.

edonley at 12:32 AM January 24, 2012
Mitt and his swiss bank accounts and offshore holdings has no business seeking to represent ordinary Americans with elected office.

Quick, how many in Congress have off shore holdings? Do you think the Kennedy family has all their money in the US? There are financial advisors out there that will tell the super rich to diversify their holdings in several banks (in case one crashes) and in other countries(in case a country crashes). They also will denominate it in several currencies to mitigate risk. It’s not un American to hedge your risk.

mcn4165 at 12:01 AM January 24, 2012
NO, like most of Wall Street and mega rich executives, Romney took his PAY in the form of stock. So see, when average Americans want to buy a stock, they have to pay their tax rate of 18-35% on it and THEN with the after tax money, they can buy stock. However, Romney takes his 80k all in company stock so he basically is way ahead of everyday Americans in the stock market. However, for Mittens, he bysteps that first tax step and takes his pay in stock so that once he sells it, he only pays 15% maximum rate. THAT is what pisses people off that the system is rigged and ordinary Americans are shut out of this game. I also assume they don’t pay into FICA (Social Security) fund when they sell this stock.

Total fallacy and a failure to understand the concept of investing above. When one invests in a start up or takes a position in a company through a private equity transaction, you have to take stock(equity) or debt. Romney put his own money into a fund (after paying taxes on that money) and also persuaded investors to put money into that same fund. Romney was paid a salary to manage that fund and make investments. He was probably paid 20% of the value of the fund after all exits-and in some cases he might have put some extra after tax money of his own into the investment to juice up his potential return. They call that increasing your beta.

When the company exited, he paid 15% capital gains on the income. He didn’t pay into FICA. However, he either paid a self employment tax that went to FICA or if he paid a FICA tax on the salary he drew as a fund manager.

American’s are not shut out of the investment game. Anyone can buy a listed stock on the NYSE (\$NYX) or NASDAQ(\$NDAQ). They are shut out of the Private Equity/Venture Capital/Angel Investor game-but not by the choice of Wall Street or anyone else. They are shut out by the SEC, IRS, Congress and the Federal government. In order to invest in those types of things you have to be an accredited investor. The Democratically controlled Congress recently changed the rules under the Dodd-Frank act to make it more arduous to qualify as an accredited investor.

There will be a lot of spin on Romney’s taxes. That’s why he was reticent to show them. I am glad he did. He can counter act any bad spin and has plenty of time to explain them before the election. What I’d love to see him do is give a down and dirty (not wonky) lesson on American capitalism.

He ought to take the time to talk about his failures as an investor and why those moves didn’t work out. How did he screw up and what did he learn? Why will that make him a better President. That will be a lot more informative than releasing his taxes.

Now, if we could just get marginal candidates Ron Paul and Rick Santorum off the stage…..and begin to deeply investigate Obama’s background as hard as we are pursuing Romney’s.