If you've met my husband you know he gets ticked when people dont do their research and speak without all the facts, so here is a brief lesson in double taxation, just to clear up all the misunderstanding. FYI I am not voting for Mitt Romney, please dont take this as an endorsement (not that anyone cares but just thought I would throw that out there).
Recently, much of the political conversation has focused on tax rates. Unfortunately, most of the news conversations I’ve heard purposely ignore certain details.
As with any technical subject, one can paint an incorrect picture if they pull things out of context. In our system, different types of income are taxed differently, and there are usually reasons for it. For instance, money I receive from my job is taxed differently than money paid out by a corporation I own. Often times that money is taxes more than one time along the way, so looking at only one of those taxes doesn’t tell the full story. The biggest example of this is when people claim that “rich” people only pay 15% in taxes on money earned from their investments. In reality, income earned by large corporations in the US are taxed at 35%. Then, when that money is paid out to the owners, the federal government gets another 15% of what’s left. However, that first 35% doesn’t show up on personal tax returns. This process of taxing the same money multiple times is often referred to as “double taxation.”
The picture is much more complicated than what you hear from politicians. But the details they leave out DO matter. When someone has multiple types of income, you can’t judge their taxes by just looking at their personal tax return any more than you can learn to cook Thanksgiving dinner by just watching someone carve the turkey.
Does Warren Buffett pay a lower tax rate than his secretary? If you looked only at his personal tax return, you may think he does. But when you look at all the different taxes taken out before he sees his money, the answer is clearly “No”, and Mr. Buffett is fully aware of this.
If you’d like to hear an expert’s opinion on this, here’s a quick article from the NY Times written by a Harvard economics professor.
http://www.nytimes.com/2010/10/10/business/economy/10view.html
Ashley’s Brief and Very Limited Understanding. Let’s pretend for a moment that I decided to open a donut shop and it was wildly successful (because why wouldn’t it be). I owned and operated the shop for 15 years averaging a salary of $1million per year. During this time my average federal tax rate was about 31% (pretend I live in Texas so the issue of state income tax is irrelevant). After 15 years I decide that I hate the hours a donut baker works and I close down my shop, but I decide to take some of the money that I had earned while working in the shop and invest it. I invest $1 million in stock in Company XYZ. I keep my money in Company XYZ’s stock for 2 years, but after that time I decide I am risk adverse and that I would rather the money sit in a savings account (even though it is above the FDIC insured amount) so I pull my money out. Turns out that during the 2 years my money was invested, stock in Company XYZ went up 20% so I made a bit of money on my original investment. By the way, in the meantime Company XYZ is paying 35% in taxes on their earnings, if that wasn’t being paid my payout would actually be more…When I take the money out it is taxed at 15%. Since I am no longer working at my donut shop, and I am not bringing in any additional income (besides the gain off these investments) it looks as if I only paid 15% in taxes… even though Company XYZ paid 35% on my money, and I paid the original 31% on the money invested.
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