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Thursday, August 25, 2011

Was Warren Buffett Right? Do Workers Pay a Higher Tax Rate Than Their Bosses?

Tax Vox Blog, Was Buffett Right? Do Workers Pay More Tax than Their Bosses?, by Roberton Williams:

When Warren Buffett called for higher taxes on the wealthy in a New York Times op-ed last week, the billionaire investor argued that he and wealthy people like him face lower federal rates than the rest of us. Low rates on long-term capital gains and qualified dividends and limited exposure to payroll taxes mean low taxes for the rich, he asserted, while more typical workers don’t get those breaks. He’s right on many of his points but not about the rich paying less tax (relative to income) than average—or even well off—taxpayers. ...


Warren Buffett may be right when he says that high-income taxpayers could pay more, especially given the extremely rapid rate of income growth at the top of the distribution. And he’s certainly correct when he says that the low tax rate on investment income cuts his tax bill well below that of many Americans. But he’s off base when he suggests that all high-income taxpayers pay a smaller share of their income in taxes than their middle-income coworkers.

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This is intentionally misleading.

It's based on "calculations" which "assume taxpayers claim only the standard deduction."

Buffett is talking about actual real world facts based on data, not hypothetical calculations based on unrealistic assumptions.

Posted by: reality bites | Aug 25, 2011 6:20:48 AM

It depends on what he was comparing. If he was comparing an employee that gets almost all of their income from earnings to himself and he gets a small proportion of his income from earnings, he probably is right. I don't remember the numbers but, in an interview with Charlie Rose, he gave the tax rate window for his employees. It struck me that his employees must be well paid to have those rates which went as high as into the 40%s. Payroll tax is a big part of his argument because it is capped.

Posted by: Anna | Aug 25, 2011 6:46:20 AM

Re: lower rates on dividends and capital gains. Dividends are paid out of corporate earnings subject to corporate income tax. Therefore, the corporate tax rate should be added to the personal rate to arrive at the total rate of taxation. Lower rates on capital gains are meant, in an imprecise way, to compensate for inflation over the holding time. I may realize "income" of a $1 on something I've held twenty years but the purchasing power loss over the time means I have far less than an additional $1 of additional wealth.

Posted by: jvermeer | Aug 25, 2011 7:43:47 AM

I will believe the capital gains tax is low the day they start indexing it to inflation. I bought a townhouse in the eighties for $85k. I sold it in early '08 for $185k. And that was not a hundred thousand dollar profit.

If it had been a stock, the government would have insisted it was a profit, and taxed me on it.

Posted by: Ellen | Aug 25, 2011 8:00:53 AM

Mr. Williams doesn't actually answer the specific question. It's one thing to notice that the total tax rate for income, and for investments, keeps climbing as one goes up the income ladder, but even for highly-compensated employees ("bosses"), the mix of compensation changes from purely earned income to a mixture of earned income and investment income as stock options, etc., are added into the compensation mix. Also, the higher a person's (or household's) total income, the more deductions (other than the standard deduction) are available to it, and the higher a fraction of it is likely to be from investment income.

The actual results, looking at how much tax is paid by people in various income brackets, looks similar to the half and half line in the graph, at least at the higher end - overall, high-income groups don't pay more than 25% of their adjusted gross income in income tax (but lower-income groups pay less).

Posted by: Anthony | Aug 25, 2011 8:04:27 AM

As far as I can see, Buffet's claim goes unrefuted. Also: unsubstantiated, but that's another story.

The chart TaxProf shows indicates that, yes, the wealthy CAN pay lower income tax rates than the non-wealthy. The question is, though: DO they pay lower rates in an aggregate sense, or some majority sense, or any sense at all?

Buffett is, I think, stretching his own personal anecdote to generalize all wealthy people. I think there's a certain fit, there, but I really have no idea how wide the fit is.

Posted by: Slartibartfast | Aug 25, 2011 8:56:45 AM

Somebody's forgetting that Social Security and Medicare are taxes, and it's not Warren Buffett. We're not even getting into the part "paid by the employer". (in quotes for those of us who have at least a rudimentary understanding of Econ 101)

Posted by: MDC | Aug 25, 2011 9:04:35 AM

Whether intentionally or not, Buffet like most Liberal/Statists obfuscates the issue.

They do this by talking about tax rates as if this is a measure of tax burden. It really does not take much effort to compare the amount, I repeat the amount of tax paid for a given taxable income. You are also obfuscating Reality Bites because there can be any number of factors that affect taxable income as it relates to gross income.

I did one for a Liberal/Statist family member who is overly vocal. Someone with a taxable income of $1mil vs a taxable income of $132k (approximating his) only pays at an effective tax rate that is approximately 13% more. Sounds bad. But he pays actual taxes that are 13 TIMES greater.

Don't tell that is not valid, because I ran it for various combinations starting with Obama's $250,000 rich couple compared to so-called low income couples. The same relative numbers approximate.

Notice that the Libs never, ever talk about the tax burden on the rich; they only talk about the effective rate. Duh! 25% of a lot is a big chunk of change to give the government. Let's not even talk about the increased burden due to consumption based taxes.

Posted by: Oldflyer | Aug 25, 2011 9:07:25 AM

This argument misses the point. In fact the super rich like Buffett pay low tax rates. Primarily because they can manipulate their affairs to produce little ordinary income.

The real victims of the tax code are small businesses and professionals. None of the proposals do anything to address this fundamental inequality...the super rich will skate thru as ususal. And all of this is before you look at credits, deductions and other elements that favor the super rich.

The reform of the Constitution to limit the overreach of tax and spend starts with a new tax code.

Posted by: ezag | Aug 25, 2011 9:24:21 AM

> Payroll tax is a big part of his argument because it is capped.

As are the benefits. Until recently, social security supporters saw that as a good thing because uncapped taxes mean one of two things:
(1) Ross Perot gets $400k/year from SS, that is, very large benefits.
(2) Ross Perot notices a 15% tax.

If you're advocating uncapped SS taxes, are you suggesting (1), (2), or both?

Posted by: Andy Freeman | Aug 25, 2011 10:02:22 AM

Your graph actually proves Buffet's point. He is in the "all income from investments" and his rate tops out below 15%. Someone in the "all income from earnings" category passes 15% somewhere around $50k income.

Posted by: Gus | Aug 25, 2011 10:08:15 AM

I think it's worth repeating a point Megan McArdle made recently:

There are arguments for an against. The arguments for the carried interest are fairly compelling: without it, the partners who contributed ideas and talent end up being taxed much more heavily on their earnings than partners who contributed financial assets. This is not only sort of unfair, and impedes the ability of talented people with few financial resources to move into the moneyed class, but also might have implications for economic growth: if your gains are going to be taxed at ordinary income rates, why quit that safe job and risk all on an untried venture?

Of course, there are also arguments against. I tend to think that we tax labor income more heavily than capital income not because capital income is more awesome or virtuous than labor income, but because the supply of capital is more sensitive to tax rates than the supply of labor. Most people have the choice between working and starving, and the latter isn't really very attractive, so hours worked are only weakly responsive to tax rates, at least near current levels. But with capital, people have the choice of saving it here, saving it somewhere else with lower tax rates, or spending it now. Spending it now is pretty attractive, especially since it faces much lower tax rates than saving. So you have to be more careful about how heavily you tax capital income.

Posted by: LarryD | Aug 25, 2011 10:10:42 AM

There's an extremely easy way to answer Mr. Buffett: actual tax records.

Here's a link (though one can easily find many more)

If you look at the graphic, you can see the share of all pretax income the top 1% of earners make. And you can see the share of all taxes the top 1% of earners make. The share of taxes is BIGGER than the share of income.

Done. The top 1% (as a whole) pay a higher than average rate. (Check the math if you don't believe me). Same goes for the top 20%.

In terms of what actually gets paid to the government, the rich are paying both the most and the highest rate. Full stop.

Posted by: Deoxy | Aug 25, 2011 10:16:40 AM

Re: jvermeer: It's not at all obvious that the corporate income tax is borne by the owners of the stock who enjoy the lightly-taxed dividends. There is an extensive economic literature, and many who believe that it is borne largely by the corporation's employees in the form of lower wages or, to the extent it falls on owners of capital, by all owners, i.e. including those who own real estate, non-corporate businesses, etc., all of which compete for capital with taxable corporations.

Posted by: Mitchell S. Fishman | Aug 25, 2011 12:09:30 PM

Buffett's salary is only $100,000. If he took a salary comparable to the bosses of other large entities, his tax rate would be much higher.

Posted by: Richard S | Aug 25, 2011 4:46:19 PM

The biggest tax I pay is my real estate tax. And my house is my biggest investment. So when this bozo pays a tax on HIS investments, i.e. a "wealth tax" on his accumulated wealth, IN ADDITION to an income tax, then I will listen to him. Untill then, he is nothing but a bozo.

Posted by: Steamboat Jack | Aug 28, 2011 8:11:56 AM