What’s your definition of “taxable”?

The New York Times has a head-turning story about a James Ross, whose “taxable income” rate is 102%. Before you take too much pity on Mr. Ross, I invite you to soak in these sentences:

That doesn’t mean Mr. Ross pays more in taxes than he earns. His total tax as a percentage of his adjusted gross income was 20 percent…

Since the article states that Mr. Ross makes more than $1 million dollars a year, he has at least $800,000 each year to do with what he pleases. The quirk that enables the Times to publish a sensationalist headline is that Mr. Ross takes the bulk that that $800,000+ and pays for items that are deductible for non-millionaires, but not tax deductible for the 1%. Namely, real estate interest payments.

Thus, I take strenuous issue with Mr. Ross’s 102% calculation. He would pay more in taxes than his “taxable income,” if he were allowed to take the usual itemized deductions and reduce his taxable income. But he’s not. Thus his true taxable income (i.e., income that is taxable) is much much greater than his “taxable income” (as defined by his accountants and the NYT) — about 4.6 times greater by my calculations. His truthful tax rate? 21 percent, which is lower than mine. (And I certainly don’t make millions of dollars a year.)

The article also mentions that since interest payments are non tax deductible for the super rich, Mr. Ross has to dip into his savings to pay his taxes. This logic is sound and I believe him, but I would hasten to add that rent, groceries, and prescription drug co-pays are also not tax deductible so I’m guessing that the author of the story, James Stewart, could find many people who need to dip into their savings to pay their taxes — none of whom makes nearly as much as Mr. Ross.

In sum: the system is not broken for Mr. Ross as he pays (what I believe to be) a reasonable amount of his income in taxes — the Times just a wanted a good headline.

Note: Apologies to linking to a non-free story; the free version is available through Google.

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