Explaining Southern California's economy

Mitt Romney's taxes are a masterpiece of wealth management

GOP Presidential Candidates Debate In Myrtle Beach

Joe Raedle/Getty Images

MYRTLE BEACH, SC - JANUARY 16: Republican Presidential candidates, former Massachusetts Gov. Mitt Romney (L) and former U.S. House Speaker Newt Gingrich (R-GA) share a laugh during a Fox News, Wall Street Journal-sponsored debate at the Myrtle Beach Convention Center, on January 16, 2012 in Myrtle Beach, South Carolina. Voters in South Carolina will head to the polls on January 21st. to vote in the Republican primary election to pick their choice for U.S. presidential candidate. (Photo by Joe Raedle/Getty Images)

Mitt Romney released his 2010 and 2011 tax returns today, revealing that he is, as we already knew, R-I-C-H. What's eye-popping — and what explains why Romney has been reluctant throughout his political career to provide a window into his finances — is how low his federal taxes are, relatively to people who make their money on "earned income," such as wages and salaries.

The numbers are large. In 2010, Romney made $21.6 million on 2010 and paid $3 million in federal taxes, and effective rate of just 13.9 percent. In 2011, he reported making $20.9 million in 2011 and expects to pay an effective rate of 15.4 percent.

If it's any consolation to people who routinely pay taxes the mid-20-percent bracket, the Romneys overpaid in 2010, to the tune of $1.6 million. Time for a new accountant, Mitt!

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Fred Wilson lobbies for a flat tax, but why not just raise taxes on capital gains?

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Tim Boyle/Getty Images

The top of a form 1040 individual income tax return.

Fred Wilson, a venture capitalist at Union Square Ventures in New York, blogs daily at AVC and blogs well. His is the first post I read almost everyday, from a Google Reader that pipes in hundreds. I've written about his thinking before. There are times when he's great. And there are times when he drives me crazy.

On Sunday (he doesn't take the weekend off) the crazy was in evidence (in me, not Fred). After some speculation on where Mitt Romney's income comes from and why it's taxed at 15 percent, he goes on to discuss his own misgivings about getting a similar deal in his own business, due to the "carried interest" exception that allows him to treat income as capital gains. Then this:

...I am bothered by the unfairness of the situation. When I get a big distribution from our funds, I always ask my accountants how much of the distribution I should set aside for federal, state, and local taxes. The answer is usually something like 28% (the difference between 28% and 15% is the state and local taxes). And then I often think of my two brothers who probably pay 40-50% of their income each year in federal, state, and local taxes. It just seems so unfair.

And so lately I've been more and more attracted to the idea of a flat tax where everyone pays the same tax rate on income above a minimum amount. In this model, we would eliminate all tax deductions; for mortgages, charitable giving, for medical expenses, etc. There would be no difference in tax rates for ordinary income vs other forms of income (ie capital gains).

If we did that maybe everyone could pay a 15% tax rate like Mitt Romney and our family does. We would have a fair tax system.

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Why are politicians fixated on a 'simple' tax code?

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kenteegardin/Flickr

Pictured: the advanced technology used to calculate the nation's taxes.

Herman Cain has his 999 plan. It's so much simpler than the excessively complex system we have now. Rick Perry just unveiled his 20-20 plan, which is also so much simpler than the excessively complex system we have now. And just today, I heard California Senator Dianne Feinstein support a recommendation, from Erksine Bowles and Alan Simpson's Deficit Commission, to reduce out current six tax brackets to three: 12, 20, and 27 percent (the top rate is now 35 percent).

Simplicity, it seems, sells. But why?

If anything, federal taxes are far easier to file than ever. I used TurboTax for the first time this year and, once I had gathered all my documents, the process consumed about an hour. In 1979, however, long before TurboTax came along, people managed to deal with 17 tax brackets, using a Bic ballpoint and calculator. In 1945, they confronted 24 brackets with nothing more than a No. 2 pencil, a pad of paper, a pack of Lucky Strikes, and stiff drink.

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Do the math: Find out if you're in the '1 percent'

Occupy LA

Eric Richardson / blogdowntown

Those participating in Occupy Los Angeles march toward City Hall.

Ah, the Wall Street Journal. It serves capitalism, but it's also a newspaper, so it wants to jump on trends. Add some nifty, number-crunching online technology to that and you get this calculator, which will swiftly tell you just where you fall in the U.S. income distribution

Give it a try! But don't get hung up on income! Remember that much of the top 1%'s wealth comes from capital gains, not wage income. So you might be looking pretty good as a household if you bring in $200,000 per year and rank in the 94th percentile. But remember that you're then taxed at the 28 percent IRS rate, while a true 1%er — which I define as a member of the U.S. financial elite, making money from money rather than from labor — is seeing their capital gains taxed at 15 percent.

There are plenty of people in the U.S. who think they're rich, but they aren't. And even if they're in the 1% as set by earnings ($506,000 annually), the gulf between you and a 1%er who makes the same off less heavily taxed investment and divident income is vast.

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