Saturday, August 06, 2011

Warren Buffett's Secretary and Other Fantasies

During the run up of the discussion on the Debt Limit, one of the claims made by supporters of increases in taxes was that Warren Buffett pays a lower tax rate than his receptionist.   For example, there is a YouTube of Buffett making the claim here.   Is Buffet's claim reliable?

First, the "rate" here is average not marginal rate.    In other words, take all the income that his receptionist earned (from salary, savings, interest, and other sources) and divide it by the amount paid in all taxes (income, social security, other employment taxes - the calculation presumably excludes things like sales and property taxes as well as license fees.).   Ditto for Buffet.   Buffet's marginal rate for income earned is the top rate. But of course most of his income comes from investments and he is a long term investor so his average rate would be somewhere between 15% (if all of his income is from capital gains) or the highest marginal rate.   One can infer that the vast majority of his income comes from these sources to lower his rate to just above the capital gains rate.   The Nebraska income tax keys off the federal return but the top rate begins to apply at a very low level of income. ($54,000 for a married person filing jointly).

Second, if one looks at the tables from the IRS data for income taxes paid by adjusted gross income, to reach an average income tax rate of 20% one needs to make almost $160,000 per year.  I am not sure about Mr. Buffet's compensation ranges but that sounds like a pretty handsome salary for a receptionist in Omaha.  Add in the other taxes (Social Security, Medicare, Unemployment,Nebraska Income tax) and you might well get to a 30% rate.   The average federal income tax rate for some earning $30,000 per year is under 14%.  Double the income and the average rate jumps to just under 16%.   The Nebraska income tax rate schedule shows that for a married person filing jointly, the highest rate (7%) begins to attach at $54,000. (The rates begin at half that income for single filers.)  Let's assume that Buffett does not pay his receptionist $160,000 per year - if you assume payroll tax and federal and Nebraska income tax you can get the average rate to 30%.   According to the Nebraska Revenue Department a worker with a median income of $45,000 pays a rate of 7%.   But it is pretty hard to imagine, that unless Mr. Buffett is still deducting his gift to the Gates Foundation (which presumably can be carried over five years if it exceeds the percentage limit on charitable donations), how he can reach a 17% average income tax rate.

Mr. Buffett's receptionist also does not seem to be taking advantage of things like retirement savings.  Were she to maximize those savings her average rate on income would decline.  It seems odd that the "oracle of Omaha" has not encouraged his employees to save for their retirement.

One more fact check, based on my own data.  Last year I made considerably more than even the hypothetical receptionist.  I was a joint filer.   I've kept a spreadsheet on my average tax burden for all of my working life.   I am married and filing jointly.  My total tax burden including sales, property, income and employment taxes was under 32%.  My combined income tax burden (California and Federal) was just under 26%.   Admittedly my return did not have the capital gains that Mr. Buffett's did.   But from even this cursory review, his numbers a bunk.

Finally, a tax policy comment.  Buffett has long favored a progressive consumption tax, where taxpayers pay on their consumption and all savings (including unrealized capital gains, retirement savings) go untaxed.   The lowered rate for capital gains, which Mr. Buffett seems to object to but which he also seems to take advantage of, is a precursor to the very system that he says he believes in.  He must be making a political rather than an economic point.   But most of us had already figured that out.

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