How to Raise Taxes Without Really Trying or: Mr. Romney Goes to Washington

When a man will not reveal his intentions, he leaves it to us to infer them from his behavior.


If you go back the first post of this blog I said that I didn't want to really try to address any big issues.  If you read through some of my blog posts you can quickly tell that I'm perfectly happy analyzing bags of candy and daytime television.

There are occasionally things that pop up in the news cycle that cry out for someone to really sit down and do the math to it, so to speak.  I think that one of the things that originally got me thinking about doing a stats blog was the proliferation of charts and graphs that different groups use to paint a distorted picture of their opponents.

When it comes to politics, I consider myself very much an independent.  Many of my stances on political issues are fairly liberal, though some of them are pretty conservative.  Depending on what issues you talk to me about you might think something completely different about my political leanings.  While my recent voting record might suggest that I lean more to one party than another I would instead say that recent elections have more highlighted those issues with which I align to one of the parties.

Why am I going on about politics instead of setting up a stats question, you ask?  Well, I'm getting there.

It's because I want to try to write the following post as objectively as possible without being accused of letting my own biases drive the results or select the results that I'm looking for.  If I wanted to be mean to one candidate or another, I could write a much different post.  I could probably do so in one or two charts.  Charts would also be much easier to spread without thinking, and are easy to get the point from (wrong or right).

So I apologize in advance, because I'm not going to just give you one or two charts out of context today.  In fact, today's post is going to have a lot of words.  Sorry again.  


You see, today I want to talk about taxes.

Since well before the first presidential debate of this year I've been wondering about Mr. Romney's tax plan.  Part of this is because the tax plan he has given is fairly non-specific.  There are a few facts that we can work from, however:

1) Mr. Romney has said (during both debates, on his website, and on many television commercials) that he has no plans to raise the tax rate on anyone.
2) Mr. Romney has said (again in the debates; it's also one of the only things on the tax section of his website) that he plans to make a 20% across the board cut in tax rates.
3) Mr. Romney has said (during the debates, also again on website) that to counter these cuts he plans to eliminate a large number of tax deductions and exemptions.
4) Mr. Romney has said (privately, to supporters; just Google 47% video if you're the last person in the country that hasn't seen it) that 47% of the country pays no taxes, and that "[his] job is not to worry about those people."
5) Mr. Romney has shown (see 2010 and 2011 tax returns) that he understands how to use tax code to legally pay a lower effective tax rate than what would normally be leveraged.
6) Mr. Romney has shown (see 2011 tax returns) that he understands how to selectively use tax code to pay a higher effective tax rate than what could legally be leveraged.
7) Mr. Romney has said that every dollar that is spent is on the table to be cut, regardless of how much he likes (or loves) those programs (from the first debate: “I like PBS. I love Big Bird. I actually like you, too. But I’m not gonna keep on spending money on things to borrow money from China to pay for it.”).



Now, each of the statements in that list is a fact.  There is no opinion here, simply things that you can go to source and verify yourself.  This is a good time for a brief aside about facts.

Facts are verifiable.  Facts reference quantifiable states of existence.  Facts are not the way things ought to be, but the way things are.  Facts can be called into question or overturned with other facts.  Beliefs can be based on facts, but are not inherently facts in and of themselves.  Untestable states cannot produce facts.  Facts are objective.

I am going to try my best to back everything I say with facts.  There are some leaps where facts are not available, and I will highlight those points.

By this point you should at least be willing to admit that the seven things listed above happened.  If you don't believe any of them there is no point in reading on until you spend some time with Google to either a) prove to yourself they did happen, or b) find verifiable facts that show that they did not.

In cases of uncertainty I am going to try to be conservative as possible in my estimates (no pun intended).  That means that if an estimate is difficult to make - and more likely represents a range of estimates - I will go with estimates that are fairest to Mr. Romney.

Now, back to taxes. 

I am going to take Mr. Romney at his word and unequivocally accept that he is telling the truth in point 1.  I honestly believe he does not plan to raise the tax rate on anyone.  Doing so at this point would not only be political suicide, but plain silly.

Why is it silly, you ask?  Because there are a lot of other options on the table.

A better question is, what are tax rates again?  Thanks for asking.  Tax rates are the percent of your taxable income that is paid in taxes.  Here are the tax rates for 2011 (from http://www.irs.gov/pub/irs-pdf/i1040tt.pdf)

Tax Bracket (Marginal)	Married Filing Jointly	Single
10% Bracket	$0 – $17,000	$0 – $8,500
15% Bracket	$17,001 – $69,000	$8,501 – $34,500
25% Bracket	$69,001 – $139,350	$34,501 – $83,600
28% Bracket	$139,351 – $212,300	$83,601 – $174,400
33% Bracket	$212,301 – $379,150	$174,401 – $379,150
35% Bracket	Over $379,150	Over $379,150

This table has a lot of information in it, and one of the things that gets a lot of people confused about taxes is what exactly these tax brackets mean.  There are a lot of people who think that crossing into another tax bracket means that your entire taxable income is now taxed at that higher rate.  That's not the case.  Here's how it works.

[Note, for simplicity's sake I'm only going to talk about the single tax rates unless otherwise specified - this has the benefit of making things simpler and is also the best case scenario for Mr. Romney in terms of bringing in the most money]

Let's say you make $5,000 taxable income.  That income is taxed in the 10% bracket, and you end up giving the government $500 (10%).  Now, let's say you have a friend who is about twice as well off as you, and makes $10,000.  That falls in the 15% bracket, so it should be 15% of $10,000, or $1,500 right?

No.  This is the main misconception of taxes.  People do not fall into tax brackets.  Their money does.

The above is not the rate that a person pays in each of those brackets - it is the amount that the money you've made in each of those brackets is taxed.  This is the idea of a marginal tax code.  Got that?  Hmmm, here's a graphic to give a better idea of this:

Much better.  Now, imagine that every time you make a dollar over the course of a year you throw it into this big multicolored bucket that you keep in your garage.  You start out the year with your first bit of income, and throw it in the bucket.  As long as you're filling up that very bottom blue section your income is being taxed at 10%.  Pretty nice.

Now, that blue section can only hold so much money, and after a while (about $8500) you can't stuff another dollar in it no matter how hard you try.  Now you have to start filling the red section of the bucket.

Every dollar you throw into the red section is getting taxed at 15%, but the dollars in the blue section have already been taxed at 10%.  The tax you pay on those dollars doesn't change, only the money that you continue to make.

You're having a good year, and pretty soon the red section is filled up, too.  Bummer, the yellow section is taxing at 25%.  Oh well, by the time you've filled it up you have just a little less than $79K profit, even after taxes.

I think you probably have the point by now.  You keep filling up sections until they're full, then move onto the next.  Now, the top light blue section only goes to $500,000 in my graph, because I didn't feel like making an impossible graph.  You see, that light blue section goes on forever.

Now you understand taxes.  Well, simple taxes.  

I've been trying to keep semantically consistent and use words like 'taxable income'.  Everything that we've talked about so far is based on the fact that you make X number of dollars each year.  The tax code isn't quite so simple, though, and the other driver of how much you pay in taxes are deductions.

What does a deduction or exemption do?  Put simply, it deducts or exempts dollars from your taxable income, or exempts you from part of your tax burden.  Do you know what that means?  You sometimes don't have to throw those dollars into our multicolored basket at all.

If I still have your attention, great!  We are almost there.

Mr. Romney is very familiar with what deductions and exemptions are.  If you follow up on the story, charitable deductions are part of what allowed him to do both 5 and 6 in the above list - remember the list?  Mr. Romney had given over $4,000,000 to charity in 2011, which meant that he was able to deduct that from his taxable income.  That would, in effect, lower the tax rate he ended up paying (also called the effective tax rate).  This is perfectly legal, and part of the tax code.  Instead of going nuts on things, though, he only claimed $2,250,000 in charitable donations, meaning that around $1,750,000 that could have been saved from the bucket had to go in it.

There's an important point in this last paragraph, and it relates to the effective tax rate.  The effective tax rate is different for everyone, and is a bit trickier to figure out based just on income.  It's this effective tax rate where much more subtle changes can be made.  This is why I said earlier that it's downright silly to mess around with the overall tax rate.  The overall tax rate can be put in a little table, and it's pretty easy to conceptualize and understand.  Changes to that are things that you can explain away in soundbites on 24 hour cable channels.  You can probably picture that table showing up as a nice simple graphic.

Changes to the effective tax rate take a bit more garrulousness.  

Want to know what your effective tax rate is before any deductions and/or exemptions?  It's a piecewise function, and without belaboring the point here's what it looks like:

There's actually a great discussion of asymptotes and limits to be had here, but that's not for today.  What you should take away is that no person will ever pay 35% of their income in taxes under the current tax policy.  While some of their money (the more they make, the greater proportion) will be taxed at 35%, they always had their first $379,150 taxed at lower rates.  

This is actually a point in favor of Mr. Romney - I've heard people toss out the numbers on the amount of tax he should pay if he was taxed at 35%.  This is actually an overestimate - like I said no person should be at the full 35% rate.  

If you're curious, the formula you should use to figure out the taxes someone should pay if they make more than $379,150 is:

850+3900+12275+25424+67567.5+((TAXABLE INCOME-379150)*.35)

In the case of Mr. Romney, who made $29,000,000 in 2011, this amount would be $10,127,314.  You can divide that by his income to see that would be a base tax rate of 34.92%.  Not a huge difference, but a difference nonetheless. 



Let's continue.  

There are a few points remaining, and they are all important parts of the big picture.  Let's recap for a second.  

We've covered points 5 and 6 pretty well, and you might be starting to see hints of point 3.  Point 1 is really an overarching point requiring the rest to fit into place, so points 2, 4, and 7 are next up.  Let's knock 2 out of the way really quick.

Now that you understand the idea of tax rates, we can talk about what a 20% across the board cut in tax rates means.  If you've been reading other posts you know not to be fooled by percents of percents, and that is exactly where we are.  The current tax rates are 10%, 15%, 25%, 28%, 33%, and 35%.  Mr. Romney has not specified what he wants to cut by 20%, so the reasonable assumption (still an assumption) would be that it is these rates.  That represents a pretty nice savings. 

20% of 10% is 2%.  20% of 35% is 7%.  I can see some of you there in the back nodding your heads knowingly, and this one is actually pretty clear.  An across the board percent cut to percentages is a differential cut.  The decrease in the highest tax bracket is over three times larger than the decrease in the lowest tax bracket.

For instance, Mr. Romney would end up paying $8,101,851.20 in taxes in this new plan (if he paid them all), for a savings of $2,025,462.80 and an effective tax rate of 27.9%.

[Here's 20% cut formula for those over $379,150: 
680+3120+9820+20339.2+54054+((TAXABLE INCOME-379150)*.28)]

Now, I see what some of you are smugly thinking - there's the Mr. Romney that is looking to cut taxes on the rich more than on the poor.  Not exactly - remember that this is not cuts on people, but on their money (go back to the multicolored bucket).  You would be right that not a lot of poor people get the chance to throw money into the top sections of the bucket, so this cut does differentially help the rich more than the poor.

Still, to Mr. Romney's credit it does still help everyone somewhat, right?  Well, sure, if you look at it in a vacuum, and if money was no object.  This is a costly move, and no budget with something like this in it would fly unless it was balanced somewhere else, with something else.


Now, it would be unwarranted to say that Mr. Romney had something against those 47% of people who manage to somehow pay no taxes - that is, if he hadn't said that he does (see point 4 above).

Mr. Romney would be being untrue to himself and to the backers he was talking to in that speech if he didn't try to go after those 47%, somehow.  Why should 47% of people get to pay no taxes anyway?

That brings us to a question of how 47% of people end up paying no taxes.  If we talk too much about the whys and wherefores it's likely to get more subjective than we're here for.  There are a lot of articles out there that talk about it, so if you want to really get down to the bottom of it just Google "who are the 47 percent"

There are a few big groups, though.  We'll talk about those, and make the assumption that the very small groups that might not be covered are negligible.  The only sizable group that I won't directly address is veterans, who happen to fall across each of these groups.  Veterans receive some tax deductions and exemptions for a number of reasons, though they are not a unique group for this breakdown.

According to estimates, around a third of these 47% of people are the very poor, making less than $20,000 a year.  You an go back to the table and find that for an income of $20,000 a year, you should be paying $2,575 in taxes.  This burden is reduced to zero in many cases by tax deductions and exemptions, such as the earned income tax credit and child tax credit. 

So how many people fall into this group?  Well, how many taxable adults are there in the United States? [Note: the following numbers will be pulled from the most recent US census data here: http://quickfacts.census.gov/qfd/states/00000.html]

The 2011 estimate of the US population was 311,591,917.  Now, 23.7% of those individuals (or 73,847,284) are under the age of 18 and have no tax burden.  That leaves 237,744,633 people in the US who are age 18 or higher.  This would be the maximum number of people who could pay taxes.

Now, Mr. Romney's comments focus on 47% of those people, or 111,739,978 individuals.  If a third of those people make less than $20,000 and have their tax burden reduced to zero, we're talking about 37,246,659 individuals.

Here's where we have to make some estimates, and I'll make them in a best-case scenario for Mr. Romney.

Let's say that every one of those individuals is single, and every one of those individuals makes $20,000.  That would mean that each of those individuals owes $2,575 in taxes, for a grand total of $95,910,146,925.

Okay, now we're talking rolling around money.  If that third of Mr. Romney's 47% didn't have any deductions or exemptions to fall back on, the IRS could be able to collect UP TO almost 96 billion dollars in extra revenue.

Keep in mind, that's without raising tax rates at all.  Even if Mr. Romney had cut tax rates 20%, as he says he will, that would still be $2060 from each person, or around $76 billion dollars.

I can see some people nodding knowingly again.  You can lower taxes 20% and still collect $76 billion extra revenue, just from this small group of individuals.  Based on Mr. Romney's remarks (point 7), this money is on the table.  He might like low income people, he might even love them, just like Big Bird.  In the grand scheme of things, even if he does Mr. Romney has shown that he would never leave $76 billion just sitting on the table.

That's only a third of the 47%, by the way!  There's still money on the table, so let's move to another group.

Unfortunately, there's another group that simply doesn't make any money, or so little money that it falls under limits of what is taxable.  Big parts of this group are students, the unemployed, and the destitute.  This would - for example - include a good segment of the homeless population, and from a tax perspective there's simply nothing to be taxed.  It's difficult to find hard estimates on these populations, but I've found several sources that put this group somewhere between 40-50% of our 47% (or about 18-24% of the total taxable population).

No use trying to get blood from a stone.  That leaves us with around 15-20% remaining, and that group is predominately the elderly.  A large part of the elderly population actually ends up paying no income tax due to two factors.  The first is the fact that income from social security is not taxed.  The second is things like the standard senior deduction that reduce the taxes on other non-social security income to zero for those individuals.

Now, remember: Mr. Romney may in fact like, or even love, the elderly.  That fact simply does not earn them a free pass, however, and money on the table is money on the table.  How much does this segment of the 47% have to contribute as their fair share?

The average social security payment in 2011 was $1,180.80, monthly.  The absolute highest payment is $2,366.  This gives us two numbers to work with.  This means that the average person on social security is making $14,169.60 a year, and paying no taxes on it!  They might even be making up to $28,392 - tax free.

How much taxes should these people be paying, if they wanted to be fair contributors?  We're talking about 22,347,995 individuals, and if each of these people was making the maximum amount of social security we'd be talking about $3833.80 per person, or up to another $85,677,743,231, at current tax rates.  If Mr. Romney were to lower taxes by 20%, that would only be $3067.04 a person, or $68,542,194,584.80.

You might say again that Mr. Romney likes, even loves the elderly.  Well, we have to go back to point 7.  If Mr. Romney was prying a loaf of bread out of his own grandmother's hands it wouldn't be important that he did or didn't like or even love her, but rather that we didn't have to get a single dollar from China to pay for that bread.  A large number of elderly are nested in the 47% that Mr. Romney has said it is not his job to worry about.

This $68 billion, in addition to the $76 billion from the other group, comes to (around) $144 billion dollars.   

It's simple logic, then, that if:

- Mr. Romney has said that it is not his job to worry about these people
- Mr. Romney has said that every dollar is on the table in terms of cuts
- These people have $144,000,000,000 that can be gained to help them become equal contributors

Then Mr. Romney should in all respects come after that money.  His actions and statements, both public and private, make it clear that this should be what he goes after pretty quick.

What could Mr. Romney use this money for?  Actually, this matches surprisingly well to Mr. Romney's proposed increase in defense spending, estimated to be anywhere between 1.5 and 2 trillion dollars ($1,500,000,000,000-$2,000,000,000,000) above what President Obama has proposed to spend, over the next ten years, or 100 to 200 billion more than President Obama a year.

If all of this new revenue was put on top of the defense budget there wouldn't be too much more ground to cover - let's assume that the estimate is closer to 1.5 trillion than to 2 trillion - in the absolute best case scenario Mr. Romney would only have to come up with an extra 6 billion dollars a year to cover his new ships and submarines.  

The beautiful part of this plan is that Mr. Romney also gets to say that he will lower tax rates, and that he won't change social security benefits.  He gets to say these things because these statements are both absolutely true.  The above money comes even if Mr. Romney lowers tax rates.  Mr. Romney doesn't have to lower the amount that anyone collects in social security.  If he wanted to, he could actually increase payouts.  The trick is simply that after you get your social security money you have to give some of it back instead of keeping it all.   

Frankly, the scariest thing would be if this wasn't Mr. Romney's plan.  If he's not planning on coming after this money then he's not only being internally inconsistent, but he likely has no plan at all, or - worst yet - one that has simply been cobbled together from all different corners and never examined in whole by anyone.

Objectively, the above makes sense.  The subjective aspect that now enters into play, and that is whether or not you believe that these people should be taxed in this way.  Some of you will read the above analysis and come away saying "well, those people should pay their share - good for Mr. Romney".  This can be read as a pro-Romney piece.  Some of you will come away with opposite sentiment, and you can see it as an anti-Romney piece.

Either way, that is your personal belief, and it has no place in the factual part of this analysis.

The point of trying to understand - by deduction - the actual particulars of Mr. Romney's tax plan is to help understand what those who do or do not support him are signing up for.  Again, I go back to how I started this out - when a man will not reveal his intentions, he leaves it to us to infer them from his behavior.




P.S. One last thing - I have the feeling this piece might produce some comments.  I'm usually fine allowing anonymous comments - this time, so that people can easily reply, please come up with some sort of handle if you'd like to comment.  I'll also be moderating things to try to limit things to reasonable debate.  I apologize in advance, as that's not the usual nature of the blog.