Last week it was reported that financier James Ross paid 102 per cent of his income in taxes.
This would make him a pretty generous 1-percenter, but those numbers lie. The income taxed by the government is only a portion of that person’s income, dramatically skewing the tax rate a person appears to pay. Ross’s real tax rate? Closer to 20 per cent.
So what does income actually mean? Bruce Bartlett’s tackles this question in his latest op-ed for The New York Times’ Economix:
“Indeed, even if we start with adjusted gross income, we are leaving out of a lot of what most people would consider income. For example, interest earned on tax-free municipal bonds is excluded, as are distributions from some Individual Retirement Accounts and most Social Security benefits.
But even if we calculate tax rates based on gross income, which would include those items excluded from adjusted gross income, we still wouldn’t necessarily have a good picture of one’s true income.
That is because certain forms of income are completely excluded from the income tax base. These would include gifts, inheritances, employer-provided benefits and unrealized capital gains.”
Unfortunately different government agencies don’t agree on what definition of income to use.
Confusingly the IRS uses adjusted gross income, while most agencies including the Joint Committee on Taxation use something called expanded income. This makes it even harder for anyone to understand tax policy.