Opens in a new tab

Marginal tax rates vs. effective tax rates, or what Mitt’s and Newt’s taxes tell us

January 20, 2012

Mitt Romney, still the leader for the Republican presidential nomination, says his tax rate is around 15 percent.

That makes sense if you presume (rather than assume, since we all know what happens when we do that!) that most of Mitt's very large (again presuming) income is via investment earnings and/or his Bain Capital carried interest payments.

Both of those types of income currently are taxed at a top 15 percent capital gains rate.

One of those battling Mitt to be the GOP's eventual White House candidate, Newt Gingrich, released his tax 2010 tax return information. It shows he and the missus had adjusted gross income of $3.1 million and paid the U.S. Treasury $994,708. That comes out to a 32 percent rate of tax on that year's income.

12-10-romney-gingrich-debate

But if you look at the income tax brackets for 2010 — or 2011 for that matter — it looks like Newt and Callista should be paying the IRS taxes at the top 35 percent rate.

True, the Gingriches' marginal tax rate is 35 percent. That's the rate that applies to the last dollar that a taxpayer earns. As a person's income rises, so does his or her marginal tax rate.

Their effective tax rate, however, is less. A person's (or couple's) effective tax rate is the average rate of tax on all dollars, not just the last ones that kicked them into a higher tax bracket.

In the Gingriches' case, the 32 percent is arrived at by dividing their almost $1 million in taxes they paid last filing season by their $3.1 million adjusted gross income.

Progressive tax system trims tax bill: The reason that neither the Gingriches nor most of us pay our top marginal tax rate is because our tax system is progressive.

That means that all our money is taxed at all the tax bracket rates into which it falls.

Let's use Jim and Jane Taxpayer's $200,000 gross income, which for ease of this example, we're going to say was knocked down via deductions, exemptions and credits to $175,000.

That still leaves them, barely, in the 33 percent tax bracket for the 2011 tax year.

But their tax bill isn't $57,750 which is what you get when you multiply $175,000 by 33 percent.

Jim's and Jane's tax bill is $42,647.

It's $15,103 lower because to get to their final bill, Jim's and Jane's taxes are calculated at our tax system's progressive rates:

10% tax on $8,500 = $850
15% tax on $26,000 = $3,900
25% tax on $49,100 = $12,275
28% tax on $90,800 = $25,424
33% tax on $600 = $198

In reality, their top marginal income tax rate of 33 percent applies to the smallest chunk of their income.

So while it's fine to gripe that you're in a high income tax bracket, remember that you aren't paying that tax rate on every one of those dollars.

You also might find these items of interest:

Share:

The More Tax Posts tab at the top of this page will take you to, well, more tax posts. You also can search below for a tax topic. 

Latest Posts
Getting ready for the year-end tax countdown

October 17, 2026

Just 2½ months left in 2026. Time to start making tax plans and moves to…

Read More
TAX-SAVVY WAYS 
TO WRAP UP 2026

It’s over! With October’s extended filing deadline behind us, it is now time to focus on year-end moves to reduce your 2026 tax bill. 

You’ll find ways to do just that on the Tax Tips page (see the More Tax Posts drop-down menu at the top of the blog), as well as the separate tax tip pages for each month, notably October through December. If you’re on the Tax Tips page, you’ll find a monthly list at the end of this column. If you’re on another blog page, you can head straight to the October tips; at the bottom of that tips page you’ll find links to all the other 11 months’ collections of tax advice.

Not to spoil what you’ll find in that tax advice, but it does cover such things as tax deductions for charitable donations, investment moves that could reduce tax due, and ways to max out your tax-favored retirement savings. 

Finally, as the year winds down, things get hectic. There are lots of other things to occupy our time, like the much more fun upcoming holidays. But don’t lose sight of taxes, since timing is key. To be of use, most tax moves must be made by the end of the tax year. That’s Thursday, Dec. 31, which also is the last business day of the year. 

So that you don’t miss that final tax year deadline, also keep an eye on the countdown clock below. It will keep you on top of just how much time is left to make important, tax-saving moves. (Note: I’m in the Central Time Zone, so adjust accordingly for where you live.)

Comments
Leave the first comment