Your Real Tax Rate

Lots of people I know are incensed about Mitt Romney's taxes.

They are ticked off. How dare he pay just 15 percent when I pay 33 percent or 35 percent?

I've got news for you. He's probably paying a higher rate than you are.

The devil here is in the details. Ask anybody what they pay in taxes, and they'll tell you their tax bracket. But that's not the rate you pay on all your earnings.

The U.S. has a progressive tax system. It works like this:

The first $8,700 of your earnings in 2012 will be taxed at 10 percent.

The next $26,650 gets taxed at 15 percent, and so on and so on, until, if you make more than $388,350, anything over that is taxed at 35 percent.

Take all the Americans paying taxes. What do you think the real rate they pay is on all their money (what the pros call their "effective tax rate")?

Just 11 percent.

That's right.

So Romney paying 15 percent is paying more than that.

Then there's the 47 percent of Americans who pay no taxes at all; a group that increasingly includes middle class Americans because of the expanding list of tax credits. Of course Romney is paying more than those folks as well.

The Congressional Budget Office research shows the same trend.

Wealthy Americans, the top one percent, paid an effective tax rate of 18.8 percent compared to 4.2 percent of middle income earners. The poorest didn't pay. They had a negative tax rate of -5.6 percent.

Which means Uncle Sam sent them checks.

Still Romney's tax rate, according to the Tax Foundation, is lower than the average high income American -- who pays 25 percent.

Is it fair though, you might ask, that his income is taxed at 15 percent?

He pays that rate because most of his income comes from capital gains on his investments.

His income doesn't come in the form of a paycheck, but a dividend check; and for all but two years in this country's history, the nation has always taxed capital gains at lower rates to stimulate investment and help the economy.

What's more, these income earners typically pay taxes twice on that income -- once when they earn the money and again when they reap the rewards of investing.

Look, at the end of the day, it's not just the Mitt Romneys who benefit from this. There are also a lot of retirees who benefit as well; people who rely on their investments to fund their golden years. And God love them.

Having said all of that, I also believe this.

Romney needs to release his tax records.

And soon.

Otherwise he may never recover from the steady attack from his Republican rivals.

And this wouldn't be a bad time either to release any kind of thorough-going tax play for the nation he might have in his back pocket.

Because we do need to reform our tax system. It is too complicated, taxes too high.

Best Case for a Flat/Fair Tax

The I.R.S. out with a big report today, charging many of us are scofflaws when it comes to paying our taxes.

In fact, we've underpaid our taxes by 17 percent. That's right -- the I.R.S.’s "tax gap" resulted in tax collections 450 billion dollars below what they should have been. This proportion of individuals and companies who fail to pay their due has stayed pretty consistent at just under 17 percent.

Check out this graphic, based on 2006 year filings (the most up-to-date numbers the government has):

When you add in the fines for paying late, the total tax gap drops to 14.5 percent. Still, in most private businesses, if collections were running 15 percent below schedule, somebody would get fired.

Of course, not everybody in the group is thumbing their nose at Uncle Sam by not filing a tax return at all. Some folks under-report what they owe, others underpay.

And the people with the highest compliance with I.R.S. filings are those of us right in the middle class; the people who file because our employers are submitting W-2s directly to Uncle Sam.

You can't run and you can't hide. In other words, if you work for the man, Uncle Sam will find you. But there was another fact that caught my eye in this report, one that virtually none of the media reported. The fact that the gap -- that $450 billion -- was significantly higher than the federal budget deficit at the time. In other words, there would have been no deficit in 2006, if the I.R.S. had collected all it was due.

So for those of you out there who think we need to raise taxes - Nancy Pelosi, Paul Krugman, President Barack Obama -- the evidence shows otherwise. What we really need is a tax code that people feel is fair -- a tax code that people are more likely to comply with. A simpler tax code.

The sheer fact that nearly half of Americans pay no income taxes at all adds to that feeling the system is unfair and that some people have to pay and others don't at any later.

Because, believe me, the tax code right now is far from simple. The code is more than 72,000 pages long. Stacked on top of each other that would be 24 feet high! It wasn't always so. Take a look at the 1913 tax code at just some 38 pages... 38!

This new report is the best argument for a flatter, fairer tax code in this country, even the I.R.S. admits that.

Simplify the code, make it more effective and compliance might not be such a joke!