It’s no surprise that politicians have difficulty relating to their constituents. When Mitt Romney was asked about his finances, he admitted two facts that would sound strange to most listeners.

• Romney considers what he earned from speaking fees in one year, $362,000, as “not that much.”
• Like most individuals who earn most of their income from investments, Romney’s effective tax rate is closer to 15 percent.

For Romney $362,000 may not be that much. His net worth is estimated to be between $85 million and $265 million. The most that income from speaking can increase his net worth each year is by 0.4%. That is a drop in a very large bucket. I can understand why Romney would say that this amount is not that much. For him, it’s practically nothing.

For most people, though, $362,000 is a significant amount of money. This small portion of Romney’s annual income could support ten families or more of four members for one year. “Not that much” is relative.

When President Obama proposed the Buffett Rule, a tax on millionaires to pay a representative share of the tax burden, he had people like Romney in mind. Buffett has pointed out that his effective tax rate is lower than his secretary’s, and this happens when most of an individual’s income comes from investments. Investment income, like dividends, as well as carried interest, is taxed at a 15 percent rate rather than the sliding scale used in the tax brackets for ordinary income. People who earn high enough salaries and wages pay higher tax rates than individuals who make a living off investments.

To compare Romney with his political peers and competitors, Governor Rick Perry has indicated his effective tax rate in 2010 was 23.4 percent, and that rate is closer to what most middle-class Americans might pay in any one year. Rick Perry is the least wealthy of all the presidential hopefuls, with a net worth between $1 million and $2.5 million. President Obama and his family paid an effective tax rate of 25 percent in 2010.

How does your effective tax rate compare to Mitt Romney’s?

Update: ABC News just broke the story that Mitt Romney has made judicious use of an offshore tax haven in the Cayman Islands to shelter his assets from the U.S. Treasury.

Tax experts agree that Romney remains subject to American taxes. But they say the offshore accounts have provided him — and Bain — with other potential financial benefits, such as higher management fees and greater foreign interest, all at the expense of the U.S. Treasury. Rebecca J. Wilkins, a tax policy expert with Citizens for Tax Justice, said the federal government loses an estimated $100 billion a year because of tax havens.

Christian Science Monitor, ABC News

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In the latest CNN poll, Republican Party hopeful Herman Cain is statistically tied with Mitt Romney with support of 25% to 26% of Republicans asked, but two thirds of the respondents haven’t made up their minds. Likely a big contributor to Cain’s surge from from 9% to 25% is his 9-9-9 tax reform plan.

This plan is a significant simplification of how the federal government levies taxes on the public. The three nines refer to a starting point that includes a 9 percent federal income tax, a 9 percent corporate transaction tax, and a 9 percent federal sales tax. Despite the appearance of a tax cut due to the fact that many people pay more that an effective 9% on federal income taxes, this would likely result in a significantly higher tax bill for most people. The 9 percent national sales tax would be in addition to any state sales taxes. For the middle class and families lower than middle class on the socioeconomic scale, who need to devote a larger percentage of their income on buying the necessities of living like food, an increased sales tax makes it much more difficult to make ends meet.

Even if the new national sales tax is added only to items that are purchased new, there are some significant necessities that cannot be purchased used, such as food.

Those who support a value-added tax or a flat income tax have often recognized that “equal” doesn’t always mean “fair,” and have adjusted blanket proposals with credits that benefit those who would be harmed by a tax like this.

Defense of Cain’s 9-9-9 tax plan also relies on the idea that the costs of consumer goods will go down when embedded taxes disappear. For example, if corporations can better control their tax expenses, they won’t need to increase a product’s price to cover a potentially higher tax bill. The underlying assumption is that businesses will lower prices (or not raise prices) to compensate for lower expenses, but that doesn’t happen. When a product is sold at a certain price point, a reduction of expenses for the product just result in higher profit for the company. Companies with shareholders won’t turn away the “easy” profits earned by reducing expenses and keeping revenues the same.

We’ve seen that as recently as the airline tax fiasco. During a short period of time earlier this year, airlines had the opportunity to pay less tax. During this period of time, several airlines raised fares so customers did not see any difference in the total expense.

The 9-9-9 tax plan is not an immediate change. The plan calls for first phase that includes a reduction of the top tax brackets to 25%. The second step would be the plan that includes a 9% rate on each of the three categories. The final phase would be a flat national sales tax, eliminating income tax entirely.

This is from the Washington Post’s fact-checking analysis of the plan:

Right now, nearly half of taxpayers don’t pay income taxes, but they do pay their share of payroll taxes, which amounts to 7.65 percent of wage income (though much of it is capped at $107,000). Cain would also eliminate the earned-income tax credit, which is intended to lift working Americans out of poverty. Many of these workers currently receive tax refunds.

On top of that, Cain would introduce the new sales tax, which would affect lower and moderate-income people who spend most of their income on purchases, not savings and investments. Depending on how you do the math, people now paying zero or negative taxes might be faced with a 27 percent tax on income.

In other words, while on paper Cain is promising a tax cut, in reality tens of millions of lower-income Americans would face tax increases. People in high tax brackets — 28 percent and higher — would likely see big tax cuts.

Do you support the 9-9-9 tax plan?

Photo: johntrainor
CNN, Washington POst

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The IRS has finalized the 2012 federal income tax brackets, but most people aren’t concerned with these numbers until next year. In April 2012, you’ll need to be concerned with the 2011 tax brackets to file your 2011 income tax returns. Most taxpayers won’t need to deal with the 2012 rates until early 2013.

While tax laws are always in flux, and things could change before 2012 tax returns are due in April 2013, the new tax brackets are official. They increase each year due to inflation. I’ll update these tax tables if the IRS announces any changes. For those who like to get a head start on their tax planning, these tables will at least provide a starting point.

Here are the tax tables for 2012, applicable for taxpayers filing by April 2013, still in the distant future. Keep in mind that the “taxable income” used in these tables is not your gross income. Taxable income already has certain deductions removed, like 401(k) contributions.

To lower your tax burden this year by up to $5,000, consider opening an IRA (Individual Retirement Account). Mint.com has an IRA wizard that can show you what kind of IRA to open and where to open it.

Married individuals filing joint returns and surviving spouses

Heads of households

Get your refund in as little as 8 days. E-file with TurboTax today. It’s Easy

Unmarried individuals (other than surviving spouses and heads of households)

Married individuals filing separate returns

I am not a tax professional. If you have any questions about your particular tax situation, seek the advice of a tax accountant.

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