Real Effective Tax Rates | Romney’s versus Obama’s

Content of Character ::

According to a report released by the Tax Foundation, an effective federal tax rate of 14.0% is higher than what 97 percent of Americans pay.

– By: Larry Walker, Jr. –

And according to The Tax Policy Center, the average effective federal tax rate for all Americans, as a percentage of cash income, was only 9.3% in 2011. Those in the Top 20 Percent (with incomes over $103,465) paid an average of 14.9%, while those in the Bottom 20 Percent (with incomes below $16,812) received back refundable tax credits averaging 5.8% of their incomes.

Within the Top Quintile, the Top 1 Percent paid an average rate of 20.3%, while the Top 0.1 Percent paid an average of 19.8%. It’s important to note that these are averages, which means that within each quintile some pay more than the average and others less. But overall, since the average effective federal tax rate for all of America is 9.3%, this represents a kind of minimum benchmark. What’s your effective federal tax rate?

Under the traditional model, in 2011, Mitt and Ann Romney paid an effective federal tax rate of around 14.0% (see definitions at the end), while Barack and Michelle Obama paid 17.8% (see table below). So does that mean the Obamas are more patriotic? Before you answer that, consider that the Romneys paid a total of $1,912,529 in federal income taxes, versus the Obamas $150,253. So does this give the Romneys the upper hand?

Digging a little deeper, it turns out that the Romneys paid an effective state and local tax rate of 11.3%, compared to the Obamas 7.0%. The Romneys also paid $1,541,905 in state and local taxes, compared to the Obamas $59,804. Shouldn’t state and local taxes be counted as well, since they are, after all, taxes? Yes, of course.

So when all taxes are on the table, the Romneys overall effective tax rate was 25.2%, compared to the Obamas 24.8%. And, the Romneys paid a total of $3,454,434 in federal, state and local taxes, versus the Obamas $209,057. So in light of these facts, is one of the two presidential candidates better suited for the Oval Office than the other? Is one a tax deadbeat and the other a saint? If a presidential candidate’s effective tax rate matters, then this election should be a toss up. But if it doesn’t, then Barack Obama’s entire – fair share monologue – is nothing but rubbish. The question is – what really matters?

Real Effective Tax Rates

Perhaps a more suitable measure of patriotism may be found in one’s real effective tax rate. One way of lowering U.S. tax liabilities is through charitable giving. When gifts are given to charity, the taxpayer no longer controls the assets, and so is granted a deduction against his (or her) taxable income of as much as 50% of adjusted gross income. Depending upon one’s marginal tax bracket, the tax savings may be as high as 35% of the amount given.

What happens to the money once it has been gifted? It gets spent by recipient organizations on salaries and wages, goods and services, real property, or is otherwise invested toward its charitable endeavors. Thus, charity is wealth redistribution, or if you will, a type of voluntary taxation. I would add that charitable giving is a much more efficient means of spreading the wealth than the U.S. government’s wasteful method, which after a certain limit may be summed up as little more than legalized robbery.

In 2011, the Romneys gave away $4,000,000, or about 29.0% of their income, although they only chose to claim a tax deduction of $2,250,772. The Obamas donated $172,130 or about 20.0% of their income. When we add this voluntary taxation to the total amount of taxes paid, we find that the Romneys paid a real effective tax rate of 54.4%, compared to the Obamas 45.1% (see table below).

Just to add some perspective I included data from the Roosevelts and the Carters tax returns (above). It’s interesting to note that in 1937, Franklin and Eleanor Roosevelt donated $3,024, or only about 3.2% of their income, while in 1978, Jimmy and Roselynn Carter gave away $18,637, or about 7.0%. When we add the amount of the couples voluntary taxation through charitable gifts, to the total amount of taxes paid, we find that the Roosevelts paid a real effective tax rate of 33.3%, compared to the Carters 45.6%. So was FDR a slacker? Was Jimmy Carter slightly more patriotic than Obama? And isn’t Mitt Romney a better man than them all?

Note: The Roosevelts income of $93,602 in 1937 is equivalent to $1,504,178 today, while the Carters income of $267,195 in 1978 is equivalent to $948,325. A study of historical Presidential tax returns is interesting, informative, and highly recommended for anyone serious about tax reform, as is a study of historical income tax rates.

Tax Return Analysis: Romneys versus Obamas

Following are some other key statistics from the Romneys and Obamas tax returns:

It’s notable that 94.8% of the Romneys income came from investments – interest, dividends and capital gains, versus -12.8% for the Obamas. The Obamas tax return includes a capital loss carryover of $116,151, a consequence of failed investments from the past. That’s interesting, since Barack Obama is the one always harping on the idea of government investment, yet all the while it turns out that successful investing is a trait beyond the scope of his expertise. Small wonder his taxpayer-funded green energy investments have turned out to be dismal failures.

What’s even more notable is the fact that roughly 62.4% of the Romneys income came from capital gains and qualified dividends which, based on current law, are taxed at a maximum rate of 15.0%. In contrast, around 99.0% of the Obamas income came from wages and net book sales which are taxed at ordinary rates of as high as 35.0%. Thus the Romneys effective tax rate should be considerably lower than the Obamas; but it turns out that both couples effectively paid about the same overall effective tax rate, 25.2% versus 24.8%, as explained earlier. So in spite of favorable capital gains rates, overall effective tax rates tend to balance out. One reason for this phenomenon is that most of the States don’t reciprocate (i.e. there is no favorable capital gains rate at the state level).

Next, we find that the Romneys paid $102,790, or 0.8% of their income, in foreign taxes, while the Obamas paid $5,841, or 0.7%. Thus, on a percentage basis, both families earned about an equal amount of their income from foreign sources. So is either candidate more likely to outsource American jobs than the other? I guess Obama could limit sales of his books to the USA, and cut-off the rest of the world, as if that would make any sense. I’ll let you figure that one out.

Next, we discover that the Obamas claimed a retirement contribution deduction of $49,000, or 5.8% of their income, while the Romneys claimed none. Foul! The question is that since Barack Obama now qualifies for a $191,000 a year presidential pension, why is he continuing to maximize the simplified employee pension account (SEP) deduction? In the private sector, the most anyone can exclude from income for retirement purposes, including employer matching contributions, is $49,000 per year. Yet Barack Obama gets to claim this maximum deduction, while at the same time deferring taxes on the annual contributions the U.S. Treasury makes to his pension account. Does that sound fair to you? Is Obama paying his fair share?

Is a guaranteed $191,000 a year for life, on top of a virtually unlimited presidential expense account, insufficient for Mr. Obama? In stark contrast, Mitt Romney refused to take a salary while he served as Governor of Massachusetts. So has anyone bothered to ask if he would waive his presidential salary? Would he also consider waiving the presidential pension and lush lifetime expense account? Somebody needs to ask that question. By the way, Mitt Romney could have claimed exactly the same SEP-IRA deduction that the Obamas did, based on his net business income, which would have further reduced his tax liability, but chose not to. So what does this say about character?

Next, the Obamas also claimed a $47,564 home mortgage deduction amounting to 5.6% of their income, while the Romneys claimed none. Wow! So since the Obamas claimed both a $47,564 home mortgage deduction, and the $49,000 maximum retirement contribution exclusion, while the Romneys claimed neither, this gave the Obamas an 11.4% handicap. Note: According to the Internal Revenue Service, in tax year 2010, only 25.8% of tax filers claimed the home mortgage deduction, which kind of makes the case for placing limits on this deduction.

Now when it comes to charitable contributions, as stated earlier, the Romneys gave $4,000,000, or around 29.2% of their income, while the Obamas gave $172,130, or 20.4%. But since the Romneys only chose to write-off $2,250,772, their actual deduction amounted to just 16.4% of their income. So once again the Obamas had a slight advantage, yet when their total itemized deductions are compared, we find that the Romneys amounted to 34.2% of their income, while the Obamas amounted to 33.0%, or about the same.

Finally, the Romneys federal taxes included an Alternative Minimum Tax (AMT) of $674,512, representing 4.9% of their income, while the Obamas incurred a liability was $12,491, or 1.5%. The AMT limits certain deductions and tax preferences to ensure that high income earners pay at least a minimum amount of tax. So what will happen when the AMT is eliminated? Will the rich pay less in taxes? Not necessarily, because if the same deductions and tax preferences for high income earners were eliminated from the get go, then the AMT wouldn’t be necessary. Isn’t this the objective of tax reform, to eliminate deductions and preferences, lower tax rates, and thus simplify the tax code? So when tax rates are cut by 20% in the next year or two, and that’s where we’re headed, the first place to look for deductions and preferences to eliminate is within current AMT regulations.

Content of Character

So what’s the point? First of all, we learned that in 2011, the Romneys paid a total of $3,454,434 in federal, state and local taxes, while the Obamas paid $209,057. When state and local taxes were added to the mix, we found that the Romneys paid an overall effective tax rate of 25.2%, versus the Obamas 24.8%. But when charitable contributions were figured in, we discovered that the Romneys paid a real effective tax rate of 54.4% compared to the Carters 45.6%, the Obamas 45.1%, and the Roosevelts 33.3%.

What should be clear is that measuring a person by the size of their effective tax rate reveals nothing about their character. If those who pay the largest share of taxes are the most patriotic among us, then that all but eliminates everyone except for the Top 1 Percent. If effective tax rates are so important, then why not simply convert to a flat tax (i.e. the FairTax)? That way the concept of effective tax rates becomes meaningless. In a perfect world it seems this would be the goal.

Is paying more taxes than absolutely necessary savvy? No, but anyone who voluntarily pays more must really love this country. Mitt and Ann Romney didn’t claim all of the charitable contributions they could have, and thus paid a higher amount in taxes than legally required. When it comes down to it, no one that I know cares anything about increasing their own personal effective tax rate; most are like the Obamas, preoccupied with finding ways to reduce it.

The main point of this post has been to prove that measuring any American by the size of their effective tax rate reveals next to nothing about the content of their character. Thus, Barack Obama’s entire fair share mantra turns out to be nothing but rubbish. The rich already pay more than their fair share sir. It’s time to bring on a business guy, someone who really understands what’s going on in this country. It’s time to lower income tax rates, limit deductions and preferences, broaden the tax base, and reduce the size of government. It’s time to lower the federal deficit and move towards a balanced budget. It’s time to purge Barack Obama’s jaded philosophy of – do as I think, not as I do.


(a) The Traditional Model – Under the traditional model, the effective tax rate is calculated by dividing total income taxes (before tax credits and other taxes), by total income (before exclusions and deductions).

(b) Effective Federal Tax Rate – The effective federal tax rate is determined by dividing total federal income taxes (before tax credits and other taxes), by total income (before exclusions and deductions).

(c) Effective State and Local Tax Rate – The effective state and local tax rate is determined by dividing total state income taxes, real estate taxes, and personal property taxes claimed on federal Schedule A, by total income (before exclusions and deductions).

(d) Overall Effective Tax Rate – The overall effective tax rate is calculated by dividing total federal income taxes (before tax credits and other taxes), plus total state and local taxes as in (c), by total income (before exclusions and deductions).

(e) Real Effective Tax Rate – The real effective tax rate is calculated by dividing total federal income taxes (before tax credits and other taxes), plus state and local taxes as in (c), plus charitable contributions, by total income (before exclusions and deductions).


The Romneys 2011 Tax Return

The Obamas 2011 Tax Return

The Roosevelts 1937 Tax Return

The Carters 1978 Tax Return

Romney’s Taxes: A Window Into Charitable Giving

Even at 14%, Romney Pays a Higher Rate than 97% of His Fellow Americans

Ex-presidents have huge expense accounts

President Obama’s Taxpayer-Backed Green Energy Failures

Obama’s Economic Reduction Plan

Private Equity vs. Government Redistribution

– By: Larry Walker, Jr. –

“A farmer went out to sow his seed. As he was scattering the seed, some fell along the path, and the birds came and ate it up. Some fell on rocky places, where it did not have much soil. It sprang up quickly, because the soil was shallow. But when the sun came up, the plants were scorched, and they withered because they had no root. Other seed fell among thorns, which grew up and choked the plants. Still other seed fell on good soil, where it produced a crop—a hundred, sixty or thirty times what was sown. He who has ears, let him hear.” ~ Matthew 13:3-9

For many, the American Dream consists of the hope of freeloading off of the good fortune of others for their entire lives. Yet for some, the dream is comprised of one day saving enough capital to invest in a business of their own. And for a few, the dream is to one day save enough to invest through a private equity group. For those aspiring towards business ownership, sometimes a little help is needed, and that help, in many instances comes though private equity firms.

So why would anyone dream of investing in a private equity firm? Well one big reason is that under current law, around 58% of the profits realized by private equity firms are taxed as long-term capital gains rather than as ordinary income. Long-term capital gains are currently taxed at the maximum rate of 15%, while ordinary income is taxed as high as 35%. The lower tax rate on long-term capital gains helps to compensate for the opportunity cost of investing for the long haul, and also enables a greater portion of the profits to be reinvested into the next venture, which can ultimately lead to the accumulation of a great deal of wealth.

Another reason many dream of investing in private equity groups is because they feel a calling to help fellow Americans reach their dreams. Unlike bloated, deficit-financed, short-sighted, big government wealth redistribution schemes, private equity is good for America. However, if the carried interest (the long-term capital gains earned through investing in private equity) were to suddenly be taxed at the same rates as ordinary income, then there would no longer be an incentive to invest in long-term private business endeavors.

Private equity firms fund and co-manage thousands of private businesses in the United States, employing millions of American workers, and these businesses are dependent upon stable long-term investments. If big government takes away the incentive to save and invest in long-term endeavors, then there will be no long-term investment. It simply won’t be worth the risk. And without long-term private equity investment, thousands of businesses, millions of jobs and the American Dream will be choked out of existence.

Carried Interest vs. Ordinary Income

Ordinary income is mostly comprised of net business income, fixed compensation, interest, dividends, rents, royalties, and short-term (less than a year) capital gains. Unlike ordinary income, there is greater risk involved with long-term (more than a year) capital investments. Private equity firms typically make investments over a 3 to 7 year term. The risk of tying up capital savings for many years is that the investment might be lost entirely, or may not return any profit at all. So is carried interest the same as ordinary income? Centuries of sound and settled tax policies say no. But Barack Obama, a novice, with no business experience, and a track record of failed economic policies; and Warren Buffett, a retiring billionaire, who has profited from lower taxes on carried interest during his lifetime, say yes. So who’s right, centuries of proven economic science, or 32 months of butt kissing and B.S.?

The Obama-Buffett Rule presumes that carried interest is the same as ordinary income and should be taxed at ordinary income tax rates of up to 35%, instead of at capital gains rates of up to 15%. The contention that the profits earned through long-term capital investment, which involves placing previously taxed income at risk through investing in risky business ventures, which employ hundreds of thousands of American workers, and which help drive the American economy, should be taxed at the same rate as fixed compensation, such as wages earned from labor, is quite a leap. The problem with Obama’s latest Socialist twist is that unlike fixed compensation, which is properly taxed as ordinary income, carried interest, garnered through private equity investments, only rewards general partners if, at the end of the term, the fund actually results in a net gain.

To break this down further, you have on the one hand wage earners, who work 40 hours per week, get paid weekly (or semi-monthly), consume most of their pay, and have taxes withheld from each paycheck. And on the other hand, you have private equity partners who work on a project for 3 to 7 years, expending capital and sweat equity, aiding in the employment of thousands of tax paying workers, helping make tax paying businesses profitable, and ultimately hoping to, at the end of the term, regain their investment along with a handsome profit. So is carried interest the same as ordinary income? Is all income created equal? Is Capitalism the same as Socialism? Do words still have meaning?

Private Equity in Action

Within the State of Georgia there are approximately 30 private equity firms, which have invested an estimated $26 billion in Georgia-based companies, which back approximately 340 private companies, which employ more than 175,000 U.S. workers. If more capital is diverted away from private equity investments, through errant tax policies, and instead invested in tax-free securities or some other jurisdiction, then where will the capital to fund these Georgia businesses come from? It’s not likely to come from banks, which are currently paying investors taxable interest of between .01% and 1.0% on savings. And it’s not likely to come from the federal government which is currently $14.7 trillion in debt. Thus, when private equity capital is finally taxed out of existence, there will be no capital, and most of these 340 companies will cease to exist, along with 175,000 jobs.

In the State of Illinois there are approximately 137 private equity firms, which have invested an estimated $72.9 billion in Illinois companies, which back approximately 450 private companies, which employ more than 350,000 workers in the U.S. The State Employees’ Retirement System of Illinois had nearly $525 million invested in private equity as of June 30, 2008, about 5 percent of the System’s total pension fund portfolio of more than $11.4 billion. And as of June 30, 2009, the Illinois’ Teachers Retirement System had $2.34 billion invested in private equity, about 8.2 percent of TRS’ total portfolio of nearly $29 billion. Are the billions of dollars that Illinois pension funds invest in private equity firms any more or less important than any other American citizen’s savings? I think not. If the government takes away the incentive of private equity partners, then where will this capital go? If you say, “To the Banks”, again you err. If you say, “Directly into businesses”, then who will oversee and manage these investments, the government? Yeah, right, just like Solyndra.

It’s Math!

And then there’s this hogwash about wealthy people paying lower tax rates than middle income earners. Does anyone really believe this? All you have to do is glance over at one of our “progressive” tax rate schedules, to know that’s not the case. Since our tax rate structure is “progressive”, the rates increase along with income. One’s combined tax rate is never the same as their bracket rate. In other words, you may be in a 25% bracket, but that doesn’t mean you’ll fork over 25% of your taxable income. As you can see below, married couples with ‘ordinary taxable income’ of $25,000 pay a tax of 11.6%, those with $50,000 pay 13.3%, and those with $100,000 pay 17.2%; while married couples with ‘ordinary taxable income’ of $250,000 pay a tax of 24.0%, those with $1,000,000 pay 32.0%, and those with $10,000,000 pay 34.7%.

In terms of dollar amounts, on the low-end, 11.6% of $25,000 translates into $2,900, while on the high-end, 34.7% of $10 million works out to around $3.5 million. So is paying $2,900 in taxes greater than or equal to paying $3.5 million? It’s math! One must also consider that five times out of ten, that $2,900 liability gets magically turned into a tax refund of up to $8,000, as nearly half of all American workers are either not liable for any income tax whatsoever, or fall into the negative category. So perhaps the words “fair share” could be more appropriately expressed as “unfair and not-shared”.

From Taxing the Rich
From Taxing the Rich

Although it may seem fair for Obama and Buffett to compare a private equity partner with $10,000,000 of carried interest, to a married couple with taxable wages of $100,000, it’s really not. It’s like comparing oranges to apples. Although the wage earning couple will pay federal taxes of 17.2% versus the carried interest earners 15.0%, in the end, the couple will have paid a total of $17,250 in taxes, versus $1,500,000 for the private equity partner. So is $17,250 greater than $1,500,000? “It’s math!”

The real difference is that a private equity partner may then turn around and reinvest most or all of the remaining $8,500,000 into the same company that the married couple works for, thus enabling them to continue their very employment. In terms of economics, the multiplier effect on private equity investment generates many times the tax revenue paid by the partner himself. Just add up the taxes collected on all the additional wages, salaries and business profits he helps to generate. But if that capital be muzzled, the result will be less free-enterprise and even higher levels of unemployment. Thus, while earning a salary is productive, it’s nowhere near as productive as carried interest. Perhaps there’s a reason why some of our tax policies are the way they are! “It’s math!”

If Obama and Buffett really wanted to compare apples to apples, then they would be comparing a married couple with carried interest income of $10,000,000, to a couple with long-term capital gains income of $10,000,000. Each will pay $1,500,000 in taxes. So is fairness still an issue? The truth is that no American is prevented from saving his or her own money and investing in activities generating similar capital gains. Anyone can do it, and will reap an equal reward — a maximum 15% long-term capital gains tax. But if the government ever takes away this incentive, or begins to discriminate against certain forms of long-term gains, then you can kiss the American Dream goodbye.

Government Subsidies vs. Private Equity

If the government steps in and confiscates a larger chunk of the profits earned by private equity firms, then there will be that much less capital to reinvest in new acquisitions. And what will the government do to make up the shortfall? Will the government invest in and manage new enterprises? Perhaps, the federal government will subsidize more companies like Solyndra, but then who gets the ‘return on subsidy’ (ROS), if and when the government is successful? Will every taxpayer get an equal slice of the pie? That’s highly doubtful. More than likely, the money will simply be absorbed into the federal government’s irresponsible $1.3 trillion per year budget deficits, or into its $14.7 trillion national debt, or used to pay unemployment compensation, or to dole out more food stamps, neither of which will create new jobs. In other words, the money will be pilfered and consumed rather than invested in viable job creating enterprises. And we all know that America needs more jobs, not more debt, unemployment compensation and food stamps.

Private equity investors fund American businesses which employ millions of American workers. By investing in non-public companies they typically hold their investments with the intent of realizing a return within 3 to 7 years. Shouldn’t there be some reward for committing previously taxed income for 3 to 7 years, in order to help businesses grow, and to enable employment for millions of workers, with no guarantee of a profit let alone return of the original investment? I say, yes. Obama and Buffett say, no. Where they err in their quest for “fairness” is in that 42% of the profits earned by private equity investors are already taxed at ordinary tax rates, while just 58% represents carried interest. They also fail to realize that such profits are typically reinvested back into the cash account to fund the next acquisition. You would think that at least Buffett would understand this concept, since most of his earnings have been likewise reinvested.

Hell No!

With Obama’s brand of math, one would surmise that if the government could just confiscate the $1.4 trillion in annual private savings, and use it to pay the $1.4 trillion of annual government deficits this would somehow bring about “balance”. But all it would really bring about is a permanent state of depression, mass government dependency, and even greater deficits once the government runs out of other people’s money. And considering that the best the federal government could possibly do, by confiscating additional tax revenue, is to immediately absorb it into its irresponsibly amassed $14.7 trillion in accumulated deficits, over $4 trillion of which was squandered by Obama himself, the answer to the request for more revenue is still, “Hell No”. Cut spending, stop squandering the tax dollars we’re already paying, and stop regurgitating the same old lies over and over again.

Although the federal government does employ a couple of million workers, about 59% of the money used to pay them is already confiscated from taxpayers, while the other 41% is merely borrowed from the Federal Reserve Bank and from countries like China. Every dime taken away from private investors and spent by the government is a dime taken away from private businesses and private sector workers. Once the point of no return was breached, back in 2010, there was no longer enough personal income to cover the amount of federal debt, on a per capita basis, and if this is not corrected soon, it will lead to the death of the American Dream. If there is already not enough income to pay the government’s debt, then why is Obama begging for higher taxes? When there is nothing left but government, then what? Will the government pay everyone a subsidy of say $50,000, and then proceed to levy a 100% tax on everyone in order to fund itself into infinity? Isn’t this exactly where Obama’s plan leads?

The failure of Obamanomics can be summed up in a few short phrases: If it produces jobs, tax it. If it keeps producing jobs, regulate it. And when it stops producing jobs, subsidize it. Thus Obama’s plan for deficit reduction, like his Jobs Act, is just another gimmick leading to economic reduction, job destruction, government dependence, poverty and the end of the American Dream. Obama gave it his best, but his best just wasn’t good enough for America. Hey Obama, “Hell no, and good riddance.”

*** BTW – Raising the tax rate on carried interest from 15% to 35% would result in a 133.33% tax hike, or to 39.6% would equal a 164.0% hike, just in case anyone is still considering this madness. ***

“There is a limit to the taxing power of a State beyond which increased rates produce decreased revenue. If that be exceeded intangible securities and other personal property become driven out of its jurisdiction, industry cannot meet its less burdened competitors, and no capital will be found for enlarging old or starting new enterprises. Such a condition means first stagnation, then decay and dissolution. There is before us a danger that our resources may be taxed out of existence and our prosperity destroyed.” ~Calvin Coolidge (Address to the General Court beginning the 2nd year as Governor of Massachusetts January 8, 1920)


Private Equity Info

Private Equity Growth Capital Council


The Problems with Raising Taxes on Carried Interest, Part II