Effective tax rate: What really matters

[ProVobis]

For those curious I looked into it and the capital gains tax of 15% is an effective tax rate. You do not get deductions at least at the level of a small time investor. You take 15% out of the total straight up. This would seem to make sense though considering Romney’s effective tax rate of 14%.

So, I can now say with some certainty that if you want to compare the capital gains tax rate to the marginal income tax rate you have to take this into account.

Thus the true state of things on the federal level is that the millionare who receives a salary of $20 million is in the 35% tax rate as compared to the millionare who receives an income through long term capital gains of $20 million and is paying an adjusted rate of 25% tax.

I’m sure he had some income other than capital gains and dividends so he could offset those against perhaps real estate taxes and such.

 

[Nate13]

I’m sure he had some income other than capital gains and dividends so he could offset those against perhaps real estate taxes and such.

All I have heard is he had about 300k in speaking fees. His total income was around 20 million though so the speaking fee income would not have much of an effect. The only other possibility is that some of his stock was sold within a year for a profit and he paid the short term capital gains rate which is higher. However he told us that he was paying most of his taxes on a 15% capital gains tax rate. If he was paying the higher capital gains tax rate don’t you suppose he would have cited that he was paying that rate if he could so it would look better for him?

We are talking about federal taxes here only as well. Federal does touch on real estate taxes as far as I know, that is State. Some dividends qualify for the 15% rate as well.

The taxes I looked at had both regular income and investment income. The form treats it separately in terms of taxing it and deductions never enter the equation for the investment income tax.

 

[Nate13]

??? Nate, capital gains is a type of revenue. Deductions are a different type of entry, so they are not entered in a single entry. However entering one does not prevent entering the other. Though few tax returns enter capital gains revenue (70% are deferred inside retirement accounts) practical all returns have some deductions. The reason capital gains is generally an effective rate is because really, really, few will have both a high capital gains and a high salary. (they would typically stop working). Your last paragraph maybe saying more than you think. CEO practically never have a 20 million salary - they take the pay in capital gains! It is done by awarding stock options which are sold and thus capital gains. Since CEOs selling options have no deterioration of value through inflation, it is a travesty to tax these action equal to a sale of a 20year old stock, equipment, building, land, etc…

There is no option to take out deductions from your investment income before it is taxed at the 15% rate. That is how they do normal income though. You subtract out all the deductions you qualify for first and then see what you have left as taxable income. That income establishes the income tax rate you have to pay and is multiplied by the tax percentage. Its treated completely separate from investment income though. Investment income is just X amount of profit times the capital gains rate = amount of tax.

 

[manualman]

Investment income is just X amount of profit times the capital gains rate = amount of tax.

So it’s a flat tax. Isn’t that what you guys have been grousing FOR?

Kidding! I agree that if capital gains is going to be taxed the same as wage income and have the (modified) marginal rates applies, then it should also be eligible for the same pre-tax deductions as wage income.