My fellow contributor, Paul Gregory, runs the numbers and concludes that Debbie Bosanek, Warren Buffetts now-famous secretary, must make at least $200,000 a year to be paying more in tax than Buffett. Unfortunately, Pauls argument is based on a calculation error. Ms. Bosanek might in fact make about that much moneyindeed, its likely she does, because she pays a much higher tax rate than her boss. (Update: or maybe she doesnt make that much. See below.)* But you dont have to make nearly that much to edge out Warren Buffetts effective tax rate.
Paul assumes that Buffetts effective federal income tax rate is 15 percent, the rate at which most capital gains are subjected to income tax. He then looks at IRS Statistics of Income data to find that, typically, a taxpayer would have to make over $200,000 a year to pay such a high effective rate of federal income tax.
But Buffett has never said that his secretary pays federal income tax at a higher rate than him. As he wrote in the New York Times in August, his combined rate of federal income and payroll taxesincluding payroll taxes that his employer pays on his behalfis 17.4 percent, and all of his staff, including Bosanek, pays a higher combined rate of income and payroll tax, again including the employer part. Heres what Buffett said:
"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 thats 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."
Anybody living solely off wage and salary income and making less than about $110,000 per year pays payroll taxincluding the employer partat an effective rate of 15.3 percent. So, most any wage-earner with a non-trivial income tax liability is going to be paying federal tax at a higher effective rate than Buffett.
Now, if Buffetts staff isnt just paying a higher rate than him, but a much higher rate, its probably true that theyre all highly paid, including Bosanek.* But even if she were making $60,000, shed probably still be paying more than him.
As Ive written, I think Buffetts tax code critique is flawed. Particularly, it ignores the fact that Buffetts primary sources of incomecapital gains and dividendsare subject to an additional layer of taxation, at the corporate level. Most of the proposed "solutions" to Buffetts low tax rate, including the "Buffett Rule," would cause significant problems, including increasing the already-problematic tax distortions in favor of corporate debt finance and against equity finance.
But in evaluating this issue, theres no need to get the math wrong, or to leave payroll taxeswhich are responsible for nearly as much federal revenue as personal income taxesout of the equation.
Edit to add: I just noticed something odd. Buffett quotes his tax rate, and his employees tax rates, as a percentage of taxable incomethat is, income after deductions and exemptions. The more standard practice is to look at tax rates as a percentage of adjusted gross income (AGI), which is prior to deductions and exemptions.
In Buffetts case, theres likely a good reason for doing this: hes made some large contributions to charity, which would lower both his taxable income and his tax rate as a percentage of AGI. But there are a couple of caveats for evaluating his employees quoted tax rates of 33 percent to 41 percent.
The first is that you dont need to make a six-figure income to have an income and payroll tax liability of at least 33 percent of taxable income. Ill look at my tax returns when I get to the office tomorrow, but Im sure I paid at least 33 percent of taxable income in federal income and payroll tax (including employer part) in 2010. My AGI was less than $100,000.
The second upshot is that these figures could be very misleading for workers with low incomes, whose taxable income might be only a small fraction of AGI. Such a worker might have a very high tax liability as a percentage of taxable incomeremember, were including payroll tax here, which is levied on "nontaxable" incomebut a low liability as a percentage of AGI. However, my calculation from above stands: any worker with a nontrivial income tax liability is likely paying at least 17.4 percent of AGI in income and payroll tax, even if its a lot less than 33 percent.
Original Source: http://www.forbes.com/sites/joshbarro/2012/01/25/no-you-dont-have-to-make-200000-to-have-a-higher-tax-rate-than-buffett/