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.
Updated December 22, 2011 and originally published September 22, 2011.