Editor’s Note: Reed Davis has returned with an Op-​​Ed for us at Log­a­rchism. As always, we wel­come con­tri­bu­tions from our readership.

The Jan­u­ary 23rd issue of Time fea­tures War­ren Buf­fett on its cover and con­tains a story titled “War­ren Buf­fett Is on a Rad­i­cal Track”. Fol­low­ing is an excerpt:

Buf­fett paid a tax rate of only 11% on adjusted gross income of $62,855,038 in 2010. (After deduc­tions, most of which were for char­i­ta­ble con­tri­bu­tions, he paid a still low 17% rate on his $39,814,784 of tax­able income; his office staff, mean­while, paid per­cent­ages some­where in the 30s.)

Buf­fett dis­cussed this in an op-​​ed that he wrote that was pub­lished in the New York Times on August 14. He dis­cusses the exact method by which he cal­cu­lated these tax rates in a let­ter sent to Rep­re­sen­ta­tive Tim Huel­skamp (R-​​Fowler, KS). In it, he states:

I would guess that if you would take line 60 from your 1040, plus pay­roll taxes paid by you and on your behalf, as a per­cent­age of line 43 — tax­able income — your num­ber would be in the 30s just like all of the peo­ple in our office except for me. These peo­ple make between $60,000 and $1 mil­lion annu­ally and, year after year, end in the 30s.

He gives his exact num­bers later in the let­ter, stating:

To be spe­cific, my adjusted gross income (line 37) was $62,855,038, my tax­able income (line 43) was $39,814,784 and my fed­eral income tax (line 60) was $6,923,494. In addi­tion, my pay­roll taxes were $15,300.

The fol­low­ing tables com­bines the num­bers from these articles:

Dol­lars Tax Item
62,855,038 Adjusted Gross Income (line 37)
23,040,254 Deduc­tions
39,814,784 Tax­able Income (line 43)
Dol­lars % of AGI % of Tax­able Income Tax Item
6,923,494 11.02 17.39 Fed­eral Income Tax (line 60)
15,300 0.02 0.04 Pay­roll Tax
6,398,794 11.04 17.43 Total Tax

Few peo­ple seemed to ques­tion Buffett’s fig­ures for his own tax rate. How­ever, a num­ber of arti­cles ques­tioned the tax rates esti­mated for his staff. For exam­ple, an online Forbes op-​​ed stated the following:

What stands out for me is this — either these folks in his office are mak­ing some crazy salaries, or they’re get­ting awful tax advice, or both. Here’s why I say this: In order to have a tax rate of 41% (which pre­sum­ably includes the high­est state income tax rate for Nebraska tax­pay­ers of 7%), an indi­vid­ual would have to make in excess of $373,651 in tax­able income, no mat­ter whether they’re a sin­gle tax­payer or mar­ried. At the other end of the spec­trum, in order to have an effec­tive over­all tax rate of 33%, the individual’s income would have to be in the neigh­bor­hood of $209,250 if mar­ried, $171,850 if single.

The begin­ning of the 35 per­cent bracket in 2010 was $373,651. Hence, the author appears to be tak­ing 41 per­cent, sub­tract­ing seven per­cent for Nebraska state income tax, and get­ting 34 per­cent. Since this is above the next lower bracket of 33 per­cent, a tax­payer would need to have some income in the 35 per­cent bracket to reach 34 percent.

Sim­i­larly, the begin­ning of the 28 per­cent bracket in 2010 was $209,250 if mar­ried (fil­ing a joint return) and $171,850 if sin­gle. Hence, the author appears to be tak­ing 33 per­cent, sub­tract­ing seven per­cent for Nebraska state income tax, and get­ting 26 per­cent. Since this is above the next lower bracket of 25 per­cent, a tax­payer would need to have some income in the 28 per­cent bracket to reach 26 percent.

The prob­lem is that these cal­cu­la­tion do not mea­sure the fed­eral tax rate as Buf­fett describes in his op-​​ed. That op-​​ed states the following:

Last year my fed­eral tax bill — the income tax I paid, as well as pay­roll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 per­cent of my tax­able income — and that’s actu­ally a lower per­cent­age than was paid by any of the other 20 peo­ple in our office. Their tax bur­dens ranged from 33 per­cent to 41 per­cent and aver­aged 36 percent.

Hence, Buf­fett is refer­ring to the fed­eral tax rate which does not include the max­i­mum Nebraska state tax of seven per­cent. How­ever, it does include pay­roll taxes paid by the employee and by the employer on the employee’s behalf. The fol­low­ing tables show exam­ples of adjusted gross income (AGI), wages, and tax­able income taken from IRS data for 2009:

For Sin­gle Taxpayers

AGI Wages Tax­able
Income
Dol­lars in Tax Tax as % of Tax­able Income
Income Pay­roll Total Income Pay­roll Total
45,000 41,000 26,000 3,481 6,273 9,754 13.4 24.1 37.5
61,000 55,000 39,000 5,931 8,415 14,346 15.2 21.6 36.8
86,000 76,000 59,000 10,931 11,628 22,559 18.5 19.7 38.2
133,000 114,000 97,000 20,869 16,549 37,418 21.5 17.1 38.6
1,720,000 860,000 1,493,000 500,194 38,183 538,377 33.5 2.6 36.1
2,955,000 1,339,000 2,576,000 879,244 52,074 931,318 34.1 2.0 36.2

For Mar­ried Tax­pay­ers Fil­ing Joint Returns

AGI Wages Tax­able
Income
Dol­lars in Tax Tax as % of Tax­able Income
Income Pay­roll Total Income Pay­roll Total
45,000 41,000 26,000 3,063 6,273 9,336 11.8 24.1 35.9
61,000 55,000 39,000 5,013 8,415 13,428 12.9 21.6 34.4
86,000 76,000 59,000 8,013 11,628 19,641 13.6 19.7 33.3
133,000 114,000 97,000 16,613 16,549 33,162 17.1 17.1 34.2
1,720,000 860,000 1,493,000 492,858 38,183 531,041 33.0 2.6 35.6
2,955,000 1,339,000 2,576,000 871,908 52,074 923,982 33.8 2.0 35.9

The val­ues for AGI, wages, and tax­able income are the aver­ages for var­i­ous brack­ets in the IRS data, rounded to the clos­est thou­sand dol­lars. The value for Income Tax is the tax on tax­able income, assum­ing that all of that income is ordi­nary and using the 2010 tax tables. The value for Pay­roll Tax is the pay­roll tax paid by employee and employer on wages. As can be seen, all of the rates for total tax (income and pay­roll tax) as a per­cent­age of tax­able income is in the thir­ties for all of the exam­ples. Hence, Buffett’s claim that his staff’s tax rates “ranged from 33 per­cent to 41 per­cent and aver­aged 36 per­cent” seems per­fectly rea­son­able.
There are some other arti­cles, such as this one from the Cato Insti­tute, that claim that Buffett’s num­bers are flawed. How­ever, that arti­cle looks at taxes as a per­cent­age of AGI, whereas Buf­fett is look­ing at taxes as a per­cent­age of tax­able income. Tax­able income equals the AGI minus deduc­tions. It seems to me that deduc­tions are a sep­a­rate issue. The way to fix any per­ceived prob­lem with inequitable deduc­tions is to mod­ify the deduc­tions, not to tax income from labor and invest­ments at a dif­fer­ent rate to make up for this per­ceived inequity. In any event, Buffett’s num­bers appear to be per­fectly rea­son­able for the mea­sure­ment that he clearly defines. To argue that there are bet­ter mea­sure­ments is fine. But the claim that the num­bers are flatly wrong is itself flatly wrong.