About that 36% effective tax rate for Jeb Bush

This is a guest contributor article written by Michael Kitces. Mr. Kitces is a Partner and the Director of Research for Pinnacle Advisory Group, co-founder of the XY Planning Network, and publisher of the blog Nerd’s Eye View.

Yesterday presidential hopeful Jeb Bush released 33 years worth of tax returns in the spirit of campaign transparency with a headline that he had paid an effective tax rate of 36%.

A deeper look reveals that Jeb Bush has only had one year in the past 33 that he faced an effective tax rate higher than 36%, the most recent year of 2013. That was the year the 39.6% tax bracket returned under the American Taxpayer Relief Act. In other words Bush stated his effective tax rate was 36% for the past 33 years, when in reality it was lower than that in 32 of the last 33 years and was only slightly above that level in the very last year.

The disparity between Bush’s self-reported results and a calculation of his underlying effective tax rate for each of the past 33 years based on his own tax returns is that Bush reported his effective tax obligations cumulatively over the past 33 years, which effectively weights each year by the amount of income earned in those years. And as shown below Bush’s income has indeed varied significantly over the years.

In fact as shown above from Bush’s own tax return data in many years his income and taxes were zero. However zero income years also effectively received a zero weighting in his self-reported results, while high income years with higher tax brackets receive a higher weighting. And the most recent year with the highest income – the one year Bush’s effective tax rate actually was over 36% - received the greatest weighting of all. Thus Bush’s reported effective tax rate of 36%, even though the reality is that the average of his effective tax rates across each of the years would have been only 21.3%.

Notably Jeb Bush’s total tax liabilities are also inflated by the fact that for many years when he was self-employed, he paid self-employment (SECA) taxes. While this is certainly part of one’s total tax liability, it is somewhat confusing to include it in a normal effective income tax rate calculation as these taxes appear on the personal tax return simply because Bush was self-employed. Had he earned wage income instead – which he actually did for many years – those taxes are recorded as payroll taxes, paid by the employer, and while they are a tax cost, they’re not typically included when doing a proper calculation of an effective tax rate.

When these amounts are excluded – along with a modest amount of household employment taxes that Bush paid on behalf of his housekeeper (which is a tax for his role as an employer, not on his personal income), Bush’s effective tax rate even by his own methodology is only 34%. And when all the years of his earnings are evenly weighted his effective tax rate averages out to only 20.6%.

Ultimately this isn’t meant to diminish the significance of the taxes that Jeb Bush has paid over the years, especially in his most recent and biggest income years. Nonetheless the fact remains that over the span of 33 working years his self-proclaimed effective tax rate of 36% has in reality only been his experience in just one of those years.

You can reach Mr. Kitces at the following: Pinnacle Advisory Group, XY Planning Network, Nerd's Eye View, Twitter, and Google+