Romney Rumor: Romney Pays Lower Tax Rate Than Middle-Class

Obama’s campaign is now running this video:

Is it true? In a word, no, and several groups have pointed it out.  FactCheck.org for example:

According to Romney’s 2010 tax return, he had an adjusted gross income of about $21.7 million in 2010 and paid about $3 million in taxes. That comes to an effective tax rate of 13.9 percent. That’s considerably less than the amount paid by most people with that high of an income, but in Romney’s case most of his income comes from dividends and capital gains — which are taxed at 15 percent rather than the highest marginal rate of 35 percent. Romney dipped below the 15 percent threshold because he donated about 14 percent of his income to charity.

The question, though, is whether Romney paying 14 percent is “probably less than you.”

It’s not if you look strictly at the income tax paid to the IRS. Scott Hodge, president of the business-backed Tax Foundation, released a report based on 2009 IRS tax data that found 97 percent of American tax filers paid a lower rate of income tax than Romney did. The bottom 40 percent of tax filers pay no income tax at all, or receive a refund, Hodge told us in a phone interview, and so “by definition, those people are paying less than Mitt Romney.” On average, Hodge said, people making between $100,000 and $200,000 paid about 12 percent in federal income taxes. That’s less than Romney’s 13.9 percent, and people making less than $200,000 represent more than 97 percent of all tax filers.

In fact, at 14 percent, according to the Tax Policy Center, Romney pays a higher rate than 97 percent of Americans.

Of course, that considers income tax only.  What about with payroll taxes? Then it edges up.  Again from FactCheck.org:

But there’s another way to look at this, and that is to include payroll taxes, those often unnoticed taxes that are usually withheld from an employee’s paycheck to pay for such things as Social Security, Medicare and unemployment insurance. The employer also pays payroll taxes for each employee, money that arguably would go to an employee if the company didn’t have to pay it. Together, those payroll taxes actually account for the lion’s share of federal taxes most people pay.

In February, the nonpartisan Tax Policy Center released an analysis that found that when you include income tax and payroll taxes paid both by the employee and employer, people in the middle 20 percent paid an effective rate of 15.5 percent. That’s a higher percentage than Romney (who paid no payroll taxes because he declared no wages or salary in 2010).

I’ll just note in passing that if the Obama campaign is making that argument, it would be the first time in living memory that a Democrat has admitted the employer’s share of FICA was a tax on the employee.  Romney, being retired as far as the tax law goes — no wages, living entirely on investment income — doesn’t pay employment taxes.

But what about all those people in the Obama video who say they’re paying much more?  The problem is that most people confuse their actual tax rate and their marginal rate.  Your actual tax rate is easily calculated: take how much tax you paid over your total income.  The marginal rate is what you pay on your next dollar of income at your current, basically what the tax tables tell you when you do your taxes.  But because we have a progressive tax system, that’s not your total tax rate.  Say you make $50,000 — the first $20,000 or so has a tax rate of zero.  The next maybe $25,000 is taxed at, say, 12 percent. Then, in this admittedly contrived example, you get to that last $5000, and it’s taxed at your marginal rate, say 20 percent.  But you remember your marginal rate and think your actual tax rate is 20 percent.

Update:  Here are the real marginal rates: