Does Buffett Pay a Lower Tax Rate than his Secretary?
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:
|62,855,038||Adjusted Gross Income (line 37)|
|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)|
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
|Dollars in Tax||Tax as % of Taxable Income|
For Married Taxpayers Filing Joint Returns
|Dollars in Tax||Tax as % of Taxable Income|
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.
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- Meme Watch: The Half Who Don’t Pay Taxes
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- The Ryan Game
- <span class="dquo">“</span>Fair” Unbalanced?
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- Fair and Balanced
- Take 2: Could Employing Tax Cuts Tax Employment?
- Keynes Was Right