As featured in The Wall Street Journal, Money Magazine, and more!
     

Do Millionaires Pay Less Tax Than Their Secretaries?

This article was written by in Taxes. 17 comments.


Warren Buffett has frequently claimed that he pays less tax as a percentage of his income that his secretary. President Obama has jumped on this as a basis for the Buffett Rule, a new proposed tax code that ensures that millionaires pay their fair share of income tax.

According to Buffett, his effective tax rate is 17.7 percent while the effective tax rate for his secretary, who earns $60,000, is 30 percent. There are two primary reasons that Buffett’s tax rate is so low. First, only the first $100,000 or so is subject to the payroll tax. For the secretary’s income, all is subject to this tax, while only a small portion of Buffett’s income is subject. Also, most of Buffett’s income is taxed at the lower long-term capital gains rate of 15 percent rather than the tiered ordinary income rates that are in effect for his secretary’s income.

It is also fair to consider why the secretary’s tax rate is so high. I may have to run some calculations again to check, but before I owned my own business, my effective tax rate tended to be 15 to 18 percent considering federal and state income taxes as well as payroll taxes.

Someone with a $60,000 income will also spend a larger percentage of this income on expenses subject to sales tax, increasing their total tax burden more dramatically than someone whose income is high enough so that it can mainly remain in investments or savings.

The Tax Policy Center has offered data that show that while Buffett may pay a smaller tax rate than his secretary, this is not the case on average. The research group estimates that this year, millionaires, or households earning $1 million in income or more, will pay an average of 29.1 percent of their income in federal taxes while households earning between $50,000 and $75,000 will pay an average of 15 percent. Buffett and his team do not seem to follow the norm; in fact, their tax roles are reversed.

Historically, tax situations that favor the wealthy are friendlier than they have ever been. In 1986, the top marginal federal income tax rate was 50 percent. Throughout the 1970s it was 70 percent.
In 1964, it was 77 percent. Throughout the 1950s, it was 91 or 92 percent. In the mid-1940s, the highest bracket was 93 percent. The income required to fall into the top box varied each year, but not by so much that someone earning $1 million per year in today’s dollars would have found him or herself anywhere other than in the top bracket. These highest tax brackets applies to households earning over at least $1 million in today’s dollars. Individuals today need to earn only $380,000 to be placed into today’s highest tax bracket.

Beyond the rates, the poorest and the wealthiest all have ways to reduce their tax bill, though depending on your point of view, the other group seems to have more opportunities to do so. Over the long term, tax policy in the United States has shifted greatly in favor of wealthy households and corporations, while assistance plans for the poor have been facing more scrutiny.

“People who are doing quite well and worry about low-income people not paying any taxes bemoan the fact that they get so many tax breaks that they are zeroed out,” said Roberton Williams, a senior fellow at the Tax Policy Center. “People at the bottom of the distribution say, ‘But all of those rich guys are getting bigger tax breaks than we’re getting,’ which is also the case.”

The Buffett Rule, intended to ensure that wealthiest households pay their “fair share” to avoid situations like the one between Buffett and his secretary, could be designed to have no effect on the “average” household earning more than $1 million, those households that conform to the averages predicted by the Tax Policy Center.

Associated Press

Updated December 22, 2011 and originally published September 22, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

Email Email Print Print
avatar
Points: ♦127,386
Rank: Platinum
About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 17 comments… read them below or add one }

avatar The Biz of Life

Buffett is full of it on this issue. It’s kinda sad to see him dabbling in politics and policy like this. He should stick to his circle of competence– running Berkshire Hathaway.

Reply to this comment

avatar Spokane Al

I have a hard time following the math that generates an effective tax rate of 30% for a single person earning $60k. His/her marginal tax rate is 25% which means that the first $8,375 is taxed at 10%, from $8,376 to $34,000 is taxed at 15%, and the last $25,999 is taxed at the 25% rate. This generates an overall tax rate of 18.6%. It seems to me that the additional payroll taxes would need to be spectacularly onerous to generate enough to bring the overall tax rate of this individual up to 30%. And of course calculating state taxes only muddies the water because states have such significantly different tax situations.

Reply to this comment

avatar jim

Al,

The income tax bill with standard deduction would be $8750 or about 14.5%.
The social security/medicare witholding is 7.65% for the employee and 7.65% for the employer. If you add all that up it is almost 30%. So they may just be including the full ss/medicare taxes from both employee and employer. Or rather than adding the employer share of that they might have been adding in some ~7% in taxes from the state level. I think that stating 22% is pretty clear. Many people pay more than that with state taxes but those are up to individual states. Theres also an argument that you should count the employer share of SS/medicare but thats paid by the business not the individual.

Reply to this comment

avatar kstm10

your having a hard time following it becuase they are playing a number fame, IOWS lieing out their rear end to you, they are including all the taxes someone might payr, fed income tax, fica, state sales taxes on purchases, everything,

the reason buffet is only paying 17 % is because of a deal HE STRUCK for his corporation if anyone is to blames it is him and the politicians

our fed income tax system is a progressive system, someone making 60k a year if filing single falls into the 25% tax bracket for 2011 tax period that is not a total of 25% for the entire 60k,

To take an example, suppose your taxable income (after deductions and exemptions) was exactly $100,000 in 2008 and your status was Married filing separately; then your tax would be calculated like this:

( $ 8,025 minus 0 ) x .10 : $ 802.50
( 32,550 minus 8,025 ) x .15 : 3,678.75
( 65,725 minus 32,550 ) x .25 : 8,293.75
( 100,000 minus 65,725 ) x .28 : 9,597.00
Total: $ 22,372.00

borrowed from http://www.moneychimp.com/features/tax_brackets.htm

there are a ton of websites explaining this clearly, that hjust happened o be the firt one to pop up

BUT wiat it;s not over yet! buffet only claims he PAY FED TAX of 17% he nevers says what he spends on luxury items, everyday expneses that he pays sales tax on like they say about his 60k a year secretary!

IOWS they are flat out lieing with numbers

lets just take you and I assume we use the same consumables (sales taxed items like light bulbs oil, ect)
but you make 10,000.00 and year and I make 100,000.00 a year
and we are spending 1000.00 a year on those consumables sales taxed at 7%
that means we are both spending 70 dollars a year on sales tax….

so 70 dollars of 10,000.00 comparing 70 dollars to 100,000.00 is a far less percentage of the income, in taxes, playing the numbers like this is how it makes it look like i am pay far less per my income dollar in total taxes, they should keep it plain and simple for th american peole, but the left is wanting to make it look bad to the poor so they get the poors vote… that is the onloy way they can stay in power, I think there should be a flat % tax on every dollar earned by every worker at any income level, why? Why would i want the wealthy to pay my way? I wasn;t raised to be a bum…….

Reply to this comment

avatar kstm10

and another things that kills me is the tax credits

IOW there ar ebrackes where you have a zero tax bill, IOW you paid nothing in at all yet can get money back

example
The Stimulus Act of 2009 made changes to the threshold amounts by a great difference. The income threshold went from about $12,500 to $3,000 for 2011 tax year, which made it much easier to qualify for the refundable Additional Child Tax Credit.

For example, Herb and Susan had a bad year, making only $25,000 on their sheep ranch. They have four children under 17. Their taxable income was zero, so they owed zero in taxes; but they will get an additional child tax credit deduction amount worth $1,835, or the excess of the family’s social security tax over the earned income credit, whichever is greater.

IOWS they got a free 18hundred bucks of my taxed money!

Reply to this comment

avatar Spokane Al

Kstm10, in addition to the child tax credit, the couple with four children in your example would also receive an additional refund of $5,657 via the Earned Income Credit. I am a tax preparer and this is a very common example.

Reply to this comment

avatar SteveDH

This is like comparing apples, oranges, pears, strawberries, and cantaloupe and then deciding the orange needs fixing. On an Income tax basis he and his secretary are taxed on a graduated scale wherein the more wages, salary and other compensation they receive, the higher the rate. He and his secretary pay the same tax rate on their investment income. If his secretary really pays 30% on her “income” of 60k she needs to buy a copy of Turbo Tax because the 15% ceiling is 68k. Yet they insist on adding in a myriad of other stuff in support of their get-the-rich agenda and want to “fix” income tax rates. The Tax Policy Center says it’s not the norm when only income tax is considered so tweaking those rates won’t have any effect on the income, consumption, and wealth taxes imposed by the states, counties, and cities that suck up her money. My advice to Warren would be to quit calling her a secretary, (administrative assistant would do) and give the women a raise – you tightwad.

Reply to this comment

avatar shellye ♦107 (Cent)
avatar tbork84 ♦1,867 (Half-Dollar)

I totally agree with you. Excellently put.

Reply to this comment

avatar Pat S.

Here’s the thing. Really wealthy people understand that income is not wealth. If you earn 1 Million a year but spend 2 Million a year… you are poor. If you earn 100k a year and have 2 Million in wealth (investable assets spinning off dividends, interest, or rental income) you are wealthy. Increasing taxes on dividends and other investment income, however will only discourage saving, and cause a double taxation on corporations. How about this: we just get rid of tax loopholes. I, for one favor a flat tax rate. If everyone just paid what they owed, we would be much better off. But income tax is income tax. There is no need for a tax on wealth.

Reply to this comment

avatar krantcents

Changing the tax code is very tricky. The rich have legions of professional ready to tackle the changes to help their clients. Finding an equitable solution is nearly impossible because of all the vested interests. Even a flat tax has its shortcomings because it encourages cash income. Business owners and business people will get around this too. I prefer the devil I know versus the one I don’t!

Reply to this comment

avatar wylerassociate ♦906 (Dime)

talk of tax reform has been something discussed for the last 20-30 years and it will continue because I don’t see it ever happening. It’s so easy to talk about reforming the tax code during an election year but getting it done is something else very tough.

Reply to this comment

avatar jim

The Tax Policy center is adding in corporate taxes to determine individual tax rates. That makes no sense. Individuals do not pay corporate taxes.

Here’s one of their charts:
http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=2981

Look at the top 0.1% and you see they claim the tax rate is 30.8% but a full 10.3% of that is supposedly from corporate taxes which individuals do not pay.

They seem to bed adding corporate taxes in because some vague assumption about how corporate taxes undercut everyone’s earnings or something. Thats pretty misleading if you ask me.

Reply to this comment

avatar Rob R

I just did my taxes and came out with an effective tax rate of 5.94% on my $108,000 income. By that number, I did better than Buffett’s secretary, and even Buffett himself!

What concerns me about changes to the tax code would be removal of popular deductions like mortgage interest, student loan interest, and charitable deductions. I was able to get that low tax rate based on a lot of chartiable donations we did this year between donated TONS of clothes and other goods to local charities like Goodwill in addition to the money we gave to our church and other relief organizations.

I actually wrote a satiricial piece about this on my blog, The Mainland:
http://themainland.net/2012/01/26/i-paid-less-taxes-than-warren-buffets-secretary/

Reply to this comment

avatar kg

Rob R wrote I just did my taxes and came out with an effective tax rate of 5.94% on my $108,000 income. By that number, I did better than Buffett’s secretary, and even Buffett himself!

for some reason your page will not show your adjusted gross, or your income, and you do not show your deductions at all, so I call BULLSHIT, unless you show me exsactly how you got it, I will never believe you, you can post your entire tax forms, and all you have to do is remove your name and SS numbers from them, your playing games just like buffet

Reply to this comment

avatar mary shepherd

you should want to help people whether by donating clothes or money from the goodness of your heart not to get a tax deduction, would you stop being charitable if you did not get a deduction. donations should done in secret, not as a way to help yourself but the ones you are trying to help

Reply to this comment

avatar Bill G

What I don’t get is why Buffet is complaining that he doesn’t pay enough tax. I believe the tax forms still allow you to pay extra tax against our national debt. If he thinks the fair thing to do and wants to pay a $1B more, he can just do it. The same thing is true for all the rest of these millionaires and billionaires piping up that their tax rates aren’t high enough.

Reply to this comment

Leave a Comment

Connect with Facebook

Note: Use your name or a unique handle, not the name of a website or business. No deep links or business URLs are allowed. Spam, including promotional linking to a company website, will be deleted. By submitting your comment you are agreeing to these terms and conditions.

Notify me of followup comments via e-mail. You can also subscribe without commenting.

Previous post:

Next post: