Anatomy of a middle class tax return

Tax showdown: Dante Atkins v. Mitt Romney When Ted Nugent saw the title of this week's endeavor, he was momentarily excited. Until, that is, he found out that the last words were "class tax return" instead of "school girl." But I digress.

On April 17, millions of Americans found themselves relieved'not just of the burden of having to worry about tax returns for another year, but also of some of their money, which was due and payable to the Internal Revenue Service. Others, perhaps more fortunate, found themselves filing returns documenting the refunds owed to them. Tax policy has, of course, become a frequent public policy discussion recently: terms like "effective tax rate," "Buffett Rule," and "payroll tax extension" keep on being thrown around, and those of us with less familiarity than others may have a hard time understanding what it's all about. So in honor of tax day, I shall use my own tax return to document why progressive tax reform is exactly what we need right now. As a side benefit, I also get to have a head start on releasing my tax returns for when I run for president in 20 years (just kidding). And along the way, we get an answer to the question: who paid a higher share of his income in taxes? Dante Atkins, or Mitt Romney?

I'm what could be considered a typical middle-class taxpayer. Last year, I used a form 1040A to process my federal tax return. I use this form because my taxes are too complicated to use the much shorter 1040EZ, but not so complicated as to need the full form 1040. Last calendar year, I made a total of $49,500. Most of this income came from two jobs. In addition to that, I received a comparatively much smaller amount in what's called "non-employee compensation." What's the difference? Well, when you're a regular employee of a business, you automatically have income and payroll taxes deducted from your regular paycheck. When you're an independent contractor, you don't. That income is still taxable, but you just have to count on paying whatever taxes are owed when you file your return, as opposed to having it withheld for you by your employer. But the bottom line is, I had three "jobs"'which, in the words of George W. Bush, makes me uniquely American.

I'm just a renter, so I don't get to claim the types of mortgage-interest deductions that homeowners use to significantly lower their tax bills'I get to claim the so-called "standard deduction" that just about everybody gets, and that's about it. After factoring that in, the IRS said that for the year, I owed $5,256 in federal income taxes. Fortunately for me, my employers had withheld much more than that from my paychecks over the course of the year and sent it to the IRS on my behalf: a total of $6,074. This means that whenever the IRS gets around to processing my return'and provided I did all of my math correctly'I will end up receiving a refund of $818, and will end up having paid a hair over 10.6 percent of my income in federal taxes.

But that's not the end of the story'it could have been substantially higher. You see, during the course of the year, I had saved up enough to be able to contribute $3,500 to an Individual Retirement Account, or IRA for short. Because of how the tax code works, any amount I contribute to an IRA every year (in my case, up to a limit of $5,000 for the 2011 tax year) is deductible from my income, meaning I don't have to pay taxes on it. These IRA's can usually be invested either in FDIC-insured cash deposits or in securities, as you see fit. Put another way, the government will pay you to put more money in the hands of the banks'money that I won't be able to access without penalty for another 30 years, but that the banks can use right away to make more money for themselves. Consequently, even though I made $49,500 last year, I only owed taxes as if my income were $46,000. The difference between those two tax bills? $875. The government literally paid me $875 to invest my own money. If I hadn't made those IRA contributions, I would have ended up owing money, instead of getting back a comparatively substantial refund'and I would have ended up paying around 12.4 percent of my income in federal taxes.

Now, even 12.4 percent doesn't seem very high. So given my income tax rate, why would someone like me complain that when someone like Mitt Romney pays an effective tax rate of about 13.9 percent? The answer lies in the fact that federal income taxes aren't the only federal taxes I pay. Like most everyone else who gets paid wages, I also pay Social Security and Medicare taxes'payroll taxes, for short. The tax rate for these doesn't fluctuate: it's 4.2 percent for Social Security, and 1.45 percent for Medicare. Not that these taxes are equitable either: In 2012, only the first $110,100 of wages will be taxed for Social Security and Medicare. That means that I pay payroll taxes on all of my income, but someone who makes a million a year pays those taxes on only a tenth of that.

All in all, I ended up paying $2,754.38 in payroll taxes in 2011. When you combine that with the income tax owed, you end up with $8,010.38, resulting in a total effective tax rate of roughly 16.2 percent.

Let's finalize this point: as it is, I pay a larger share of my income in federal taxes than does Mitt Romney. Remember that Mitt Romney pays virtually nothing in payroll taxes, because the type of capital gains income that Mitt Romney makes isn't taxed for Social Security and Medicare. Even worse, that discrepancy would have been even larger if the government hadn't paid me to set aside my money in ways that allow people like Mitt Romney to grow even wealthier. That system is fundamentally unfair. This is exactly why we need fixes like the Buffett Rule and the payroll tax extension that President Obama fought so hard for: the average American taxpayer deserves to know that someone in Washington realizes that Mitt Romney shouldn't be paying a smaller share of his income than someone like me.