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No, You Don't Have to Make $200,000 to Have a Higher Tax Rate than Buffett

January 25, 2012

By Josh Barro

My fellow contributor, Paul Gregory, runs the numbers and concludes that Debbie Bosanek, Warren Buffett’s now-famous secretary, must make at least $200,000 a year to be paying more in tax than Buffett. Unfortunately, Paul’s argument is based on a calculation error. Ms. Bosanek might in fact make about that much money—indeed, it’s likely she does, because she pays a much higher tax rate than her boss. (Update: or maybe she doesn’t make that much. See below.)* But you don’t have to make nearly that much to edge out Warren Buffett’s effective tax rate.

Paul assumes that Buffett’s 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 taxes—including payroll taxes that his employer pays on his behalf—is 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. Here’s 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 that’s 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 tax—including the employer part—at 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 Buffett’s staff isn’t just paying a higher rate than him, but a much higher rate, it’s probably true that they’re all highly paid, including Bosanek.* But even if she were making $60,000, she’d probably still be paying more than him.

As I’ve written, I think Buffett’s tax code critique is flawed. Particularly, it ignores the fact that Buffett’s primary sources of income—capital gains and dividends—are subject to an additional layer of taxation, at the corporate level. Most of the proposed "solutions" to Buffett’s 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, there’s no need to get the math wrong, or to leave payroll taxes—which are responsible for nearly as much federal revenue as personal income taxes—out 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 income—that 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 Buffett’s case, there’s likely a good reason for doing this: he’s 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 don’t need to make a six-figure income to have an income and payroll tax liability of at least 33 percent of taxable income. I’ll look at my tax returns when I get to the office tomorrow, but I’m 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 income—remember, we’re including payroll tax here, which is levied on "nontaxable" income—but 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 it’s a lot less than 33 percent.

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