The elections are here and in our faces whether we like it or not. With that comes, of course, a McFlurry of facts, lies, half truths and pieces of information in even more gender discriminations. I wish to touch a very brief overview of why Mitt Romney had a reported 14% tax rate on his income.
You can make money a few different ways, obviously by working and receiving a salary, selling things, or by receiving money from investments. Your tax rates vary a lot depending where your dollar is coming from. When you are paid, you are taxed on different parts of your pay. A simple quote from author Andrew Tobias should help illustrate this:
Looking at how those taxes work and considering that Romney hasn't been "employed" lately, it shows you how he can have such a low tax rate, because he has large sums of money tied in investments, and those provide him income. He also has losses, which can offset the taxes he pays on profits.
There's been a large emphasis on how taxes are unfair and that Romney is the epitome of this, but it's worth considering that people invest in the stock market because it provides them economic opportunities, by directly giving money to companies that can use it to expand their business beyond their regular means. If we go after the direct source of Romney's low tax rate, we could potentially endanger the willingness of potential investors to front their money, because they feel the tax rates don't justify the expense of putting their money into stocks or other investment vehicles. I recently discussed investing with a coworker, who is a firm believer in the "Boglehead" (Named after Vanguard founder Andrew Bogle's investing principles) ideas noted how a main concept of investing is also knowing how taxes affect money you have invested. A quote from the Bogleheads(R) wiki:
REFERENCES:
1) Tobias, Andrew (2011-01-05). The Only Investment Guide You'll Ever Need (Kindle Locations 319-322). Houghton Mifflin Harcourt. Kindle Edition.
2) Little, Ken. Taxes and Investing - What You Need to Know, http://stocks.about.com/od/taxes/a/Investtax.htm
3) Microsoft Stock Quote on Google Finance; http://www.google.com/finance?q=msft&ei=lKqBULi9HYSSlAPHeg
4) Bogleheads(R) investment principles - Minimize Taxes; http://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy#Minimize_taxes
You can make money a few different ways, obviously by working and receiving a salary, selling things, or by receiving money from investments. Your tax rates vary a lot depending where your dollar is coming from. When you are paid, you are taxed on different parts of your pay. A simple quote from author Andrew Tobias should help illustrate this:
Because the income tax is graduated, you pay no tax on the first few dollars you earn but a lot on the last few. That may average out to 10%; but, in the case above, if you earned another $ 1,000 and you're single, nearly a third of it would go straight to the government ($ 250 in federal income tax, another $ 76.50 in Social Security tax), and that's your tax bracket: 33%. (Ref #1 at bottom of post)When it comes to receiving money from investments, taxation is completely different. If you sell something for a profit, such as a stock, you are taxed on "capital gains," at a varying rate depending on your tax bracket and how long you held the stock for. The tax rate is generally around 15%-25% for a long term stock sold by someone in the 15-25% tax bracket. But let's say you sold a stock at a loss, you can write that off on your taxes, too, as a capital loss, which can offset taxes you pay on your profits. (Ref #2) The other major category in investments is dividends, which are profits paid to share holders by a company. For example, let's say you have 100 shares of Microsoft. They pay out dividends quarterly, currently 23 cents per share (Ref #3), so once every 3 months, you receive a check for 23 dollars. Those dividends are taxed at a flat rate of 15% (meaning you pay $3.45 in taxes on those dividends).
Looking at how those taxes work and considering that Romney hasn't been "employed" lately, it shows you how he can have such a low tax rate, because he has large sums of money tied in investments, and those provide him income. He also has losses, which can offset the taxes he pays on profits.
There's been a large emphasis on how taxes are unfair and that Romney is the epitome of this, but it's worth considering that people invest in the stock market because it provides them economic opportunities, by directly giving money to companies that can use it to expand their business beyond their regular means. If we go after the direct source of Romney's low tax rate, we could potentially endanger the willingness of potential investors to front their money, because they feel the tax rates don't justify the expense of putting their money into stocks or other investment vehicles. I recently discussed investing with a coworker, who is a firm believer in the "Boglehead" (Named after Vanguard founder Andrew Bogle's investing principles) ideas noted how a main concept of investing is also knowing how taxes affect money you have invested. A quote from the Bogleheads(R) wiki:
The key thing to remember about tax efficiency is that tax-efficient asset placement matters. The same funds can produce hundreds of thousands of dollars more for your retirement if you place them in a tax efficient manner.(Ref #4)My point here is not to say that we shouldn't change tax rates, but that we need to be careful in calling for higher taxes on taxpayers like Romney, because there's more to the story than just unjust tax rates.
REFERENCES:
1) Tobias, Andrew (2011-01-05). The Only Investment Guide You'll Ever Need (Kindle Locations 319-322). Houghton Mifflin Harcourt. Kindle Edition.
2) Little, Ken. Taxes and Investing - What You Need to Know, http://stocks.about.com/od/taxes/a/Investtax.htm
3) Microsoft Stock Quote on Google Finance; http://www.google.com/finance?q=msft&ei=lKqBULi9HYSSlAPHeg
4) Bogleheads(R) investment principles - Minimize Taxes; http://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy#Minimize_taxes
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