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 23^rd 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:

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

For Mar­ried Tax­pay­ers Fil­ing Joint Returns

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.

Related arti­cles

• Buf­fett Dares GOP to Donate More Taxes (newser​.com)
• Laf­fer: Class War­fare and the Buf­fett Rule (tax​prof​.type​pad​.com)
• Rom­ney says he pays about 15 per­cent in income tax (sfgate​.com)