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February 17, 2012 at 05:09 AM
There’s an old saying (based on Scripture) that affirms “the truth will set you free.” Yet I often wonder if our government officials ever heard the saying because, year after year, we seem to hear more evidence pointing to the contrary. For instance, many politicians appear to twist the truth during campaign years as it relates to our tax code in an effort to manipulate voters into believing what they want them to hear instead of the actual truth. Maybe that really isn’t the case; perhaps our politicians are just inadequately educated about the comprehensive truth as it relates to taxes.
The one area in this regard that really pushes my buttons is the barrage on the wealthy and capital gains tax versus ordinary income tax. Regardless of party or political alliances, we always see the same attacks on the rich relative to taxes. The usual portrayals seem to insinuate that the rich have somehow found the so-called “Holy Grail” of tax loopholes, allowing them to create an enormous gold mine of wealth for themselves. From that viewpoint, everyone in America seems to become jealous of their success, regardless of the work involved in actually obtaining wealth in the first place. Have we as a country come to expect a Utopian society where no one has to do anything, but should be entitled to everything?
For example, the present attacks on Mitt Romney’s individual taxes are very similar to what I’m referring to. An article entitled: “Mitt Romney’s Taxes and True Reform,” written by Mike Brownfield for The Heritage Foundation, explains why very few Americans can ever completely understand the truth about our tax code. As such, I hope I can shed some light on one aspect of the code through a simple illustration below.
Let’s assume you started a C Corporation business in 2000 that has grown into a major publicly traded company (of which you still own 50% of the outstanding stock), with excess of $500 million in gross revenues. Assuming net income of $300 million before taxes and dividend distributions, taxed at a maximum rate of 35%, the company would owe $105 million in corporate federal income taxes, with another 5% at least in state tax, or $15 million. Let’s further assume the corporation issued a dividend at the end of prior year to shareholders totaling $50 million. Of that, you’re entitled to 50% of the dividends, or $25 million ($50 million x 50%), on which you’ll have to pay 15% federal tax or $3.75 million, and at least 5% state tax or $1.25 million.
The moral of the story is this: as 50% owner of the corporation, you would have paid an estimated $52.5 million in federal corporate taxes, $7.5 million in state corporate taxes, $3.75 million in individual federal dividend taxes, and finally $1.25 million in state individual income taxes (assuming a 5% rate), totaling $65 million!
