Truth of Obama ad criticizing Romney's tax rate rests with formula

Published Aug. 11, 2012

The statement

Says Mitt Romney "paid only 14 percent in taxes — probably less than you."

President Barack Obama, in a campaign ad

The ruling

The 2010 tax return released by Romney and his wife, Ann, showed $3,009,766 in federal income tax paid on $21,661,344 in adjusted gross income — an effective tax rate of 13.9 percent.

But what do ordinary Americans pay?

If you just look at income taxes, Obama is incorrect. Here are the average effective tax rates for Americans in different slices of the income spectrum, according to a study by the Urban Institute-Brookings Institution Tax Policy Center:

Bottom fifth of earners: -12.3 percent

Second-to-bottom fifth: -4.2 percent

Middle fifth: 4.1 percent

Second-highest fifth: 8.2 percent

Highest fifth: 17.3 percent

Because these percentages are average tax rates for broad income brackets, we don't know precisely how many Americans paid more than Romney's 14 percent effective tax rate. Still, we can make an educated guess that perhaps 20 percent to 30 percent of taxpayers exceeded Romney's tax rate for income taxes alone. That's far from most, making the ad's claim incorrect.

However, there's another way to calculate it: adding in payroll taxes. Payroll taxes fund Social Security and Medicare, with half paid by the employee and half by the employer. Social Security taxes are 6.2 percent of an employee's first $110,100 of salary, while Medicare taxes are 1.45 percent of their entire salary. Because self-employed people pay the employer's half too, and because employees of a company are assumed to be paying the employer's share indirectly through lower wages, tax analysts typically include both halves when calculating the employee's tax burden.

Counting only income taxes, as we did above, ignores a large chunk of what most people pay in federal taxes. In fact, for all but the top one-fifth of earners, the combination of employee and employer payroll taxes actually exceeds income tax payments, according to the same Tax Policy Center study.

So what happens when you add payroll taxes to income taxes? Here's the breakdown:

Bottom fifth of earners: 1 percent

Second-to-bottom fifth: 7.8 percent

Middle fifth: 15.5 percent

Second-highest fifth: 18.7 percent

Highest fifth: 24.3 percent

Once again, we can't know exactly what percentage of Americans paid a higher effective tax rate than Romney's 14 percent, but the top two ranges, plus a significant share of the middle group, most likely did. So probably more than half exceeded Romney's rate, making the Obama ad accurate.

We should note that Romney's tax rate is lower compared with taxpayers who have above-average earnings. The ad implies it's lower compared with people of modest means, but that's not the case.

So there are two main ways to make this calculation, and they lead to opposite conclusions. On balance, then, we rate the claim Half True.

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