In defense of Kim Kardashian's taxes
A California campaign comparing reality star's tax bill with that of a middle-class earner is misleading and fails to account for federal taxes.
This post is from Brett Arends at SmartMoney.
It takes a lot to get me to write about Kim Kardashianm let alone to come to her defense.
The so-called "Courage Campaign," which wants to raise California's top tax rate from 10.3%, has come out with a video arguing that Kardashian is paying way too little tax.
The video, in the way of the Internet, has "gone viral," a term that is ironically appropriate. It's like a cold that people are passing around, entirely bypassing their brains.
The group says "Kim Kardashian made more than $12 million in 2010, but she only paid 1% more in taxes than a middle-class Californian" (earning, they estimate, $47,000).
I'm sorry. I don't care where you stand politically, or on the topic of Kim Kardashian. But this is nonsense, and I have to call it out.
Why? Three reasons.
First, the campaign has the Californian tax rates wrong. (Post continues after video.)
Let's accept, for the sake of argument, the campaign's estimates are right about Kim Kardashian's income, and that of the average middle-class Californian family.
But someone earning $47,000 a year wouldn't pay "9.3%" state income tax. That's just their marginal rate on the last dollar earned. That rate only kicks in once your income crosses $46,766, if you are single, and $93,500 if you're married.
On most of their income, they are paying much lower rates, starting at just 1%.
According to the State of California's official tax publication, a single taxpayer earning $47,000 in taxable income in 2010 would have paid just $2,200 in tax. That's an average rate of 4.7%, not 9.3%. (The "millionaire" 10.3% rate on the likes of Kim Kardashian kicks in over $1 million.)
Second, the Courage Campaign is mixing up two different things: the tax rate and the actual amount of taxes paid.
These are totally different.
Kim Kardashian isn't just paying a higher tax rate than a middle-class person. She's also paying it on a much, much bigger income. The net result is that she is paying vastly more in actual taxes.
Based on the Californian income-tax schedule, if she earned $12 million in 2010 she would have paid about $1.23 million in state taxes.
The middle-class family: $2,200.
In other words, based on the Courage Campaign's own numbers, Kim Kardashian would have paid about 56,000% more in taxes than a middle-class Californian, not "1% more."
And then there's the third problem.
Even though the Courage Campaign talks about "taxes," it is talking only about state taxes. And those make up just a small share of total taxes -- yours, mine and Kim Kardashian's.
Most, alas, go to the federal government.
Once again, let's do the math. And let's keep it very simple, by ignoring phase-outs and deductions and exemptions and so on.
Based on the calculations above, if Kim Kardashian earned $12 million and paid $1.23 million in taxes to Sacramento, that would leave $10.77 million left over. Someone reporting that amount in taxable ordinary income to Uncle Sam would have to pay $3.75 million in federal income taxes. That would take Kardashian's total tax bill to $5 million.
That middle-class Californian? She's paying $2,200 to Sacramento and another $7,400 to Washington. Total tax bill: $9,600.
Bottom line? If Kim Kardashian pays $5 million in taxes, and the middle-class person pays $9,600, Kardashian has paid 52,000% more in taxes.
Not "1% more" -- 52,000% more.
In total, based on Courage Campaign's own estimates, Kim Kardashian would be paying about 42% of her income in taxes, not 10.3%.
The middle-class family would be paying 20%.
I put these points to Courage Campaign honcho Rich Jacobs. He was unmoved. "I don't mean to sound obtuse, but I'm not following you," he said. "You can quibble, but she's paying 1% more in her marginal tax rate. I would say it's fully accurate."
Actually, it's not. Certainly it is correct to say that Kim Kardashian pays the same tax rate on her 999,999th dollar as a middle-class Californian pays on her 47,000th dollar. But so what? Overall she's paying about $5 million, compared to $9,600.
It is not in any way, shape or form correct to say that "She only paid 1% more in taxes than a middle-class Californian."
Naturally there are a boatload of caveats. We don't really know how much Kim Kardashian earned in 2010 or paid in taxes. If she was able to shelter income, or categorize some as capital gains or qualified dividends somehow, she would have paid less tax than estimated here. (Jacobs, in what I can only call a brilliantly clever debating move, added that as Kim Kardashian pays a higher federal tax rate than a middle-class Californian family, she may be able to write off more of her Californian state taxes, meaning her effective rate might actually be lower.)
But a middle-class person also has access to write-offs of various kinds. I've ignored, for example, 401k and IRA contributions, mortgage interest tax deductions and various other tax breaks. Many people making $47,000 gross income a year are paying very little federal tax. A fair few, when you factor in benefits of one form or another, may be net claimants off the state.
As for that $47,000 figure: The U.S. Census thinks the median household income in California (in 2009) was $59,000.
To be sure, there are super-rich people in the United States who are paying way too little tax by almost any estimation. But they are mostly tycoons working the 15% tax breaks on capital gains and dividends, not people paying 42% average tax. (According to the latest data from the IRS, from 2008, the 400 highest-earning tax filers earned an average of $110 million a year yet paid just 18% federal tax. As recently as the mid-1990s that was 30%.) The offenses of the U.S. tax code are mainly these big breaks for the super-rich and the regressive payroll taxes on the poor.
The Kim Kardashian tax "analysis," in other words, was wildly misleading.
But apparently, in the age of the Internet, nobody cares. These claims were reported, without criticism, by wire services and newspapers. They turned up everywhere. I dread to think how many times they were "retweeted." This is the new world. Don't think, tweet! Don't report, blog! Facts? Schmacts!
As for Kim Kardashian: I wouldn't know her if I stood next to her in the line at Starbucks. I asked someone why she was famous. Apparently she has an attractive figure, especially when seen from certain angles. Why this is worth $12 million a year, or even $12 a year, is beyond me. But presumably she can wiggle that asset to another state if California hikes its taxes too high. Then the state will get 100% of nothing.
More from SmartMoney and MSN Money:
VIDEO ON MSN MONEY
It is rather simplistic to go with the tax rate, personal or business, to say what an individual is paying in taxes. All I know is that once the money starts rolling in, the ability to keep all or most of it is by having good tax lawyers and good accountants and good money managers. The people with discretionary income can keep their money "legally" through all kind of tax possibilities. If Kim Kardashian is paying more taxes than a 47k guy off the street, than she's getting lousy advice.
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