How much should a millionaire pay in taxes? President Obama says it should be 30 percent of income. Warren Buffett says it should be at a higher rate than his secretary, who he claims pays at a rate of 35 percent. But his assertion is misleading. There is a big difference between one’s marginal tax rate and her effective tax rate.
It is unlikely that Buffett’s secretary pays an effective tax rate higher than he does. If her adjusted gross income is above $379,150, she would have a marginal tax rate of 35 percent. But not all of her income was taxed at that rate. There are currently six tax brackets starting at 10 percent. It is possible that the last portion of her income, her marginal income, could place her in the 35 percent bracket but her effective tax rate is much lower. By using different rates for comparison and not identifying appropriate tax terminology, Buffett has been engaging in an expensive charade.
For instance, let’s say a married couple earns $80,000 but after taking personal exemptions, standard or itemized deductions, payments into a retirement fund and maybe three or four nice tax credits, they could have a federal tax liability of $4,000. They are in the 15 percent tax bracket as far as marginal tax rate is concerned, but would have an effective tax rate of 5 percent when all of their income is considered ($4,000/$80,000 of income).
Presidential candidate Mitt Romney was on the defensive after he admitted he paid less than 15 percent on his earnings. He need not be embarrassed. Very few Americans pay 15 percent for their federal effective tax rate, and most pay far less. The Tax Policy Center estimates that the average effective tax rate for all households is 9.3 percent.
About half of all Americans pay a zero percent effective rate. Most are not even aware that they pay no income tax with a refund larger than all of their federal income withholding. Working families with modest wages can get back as much as $3,000 or $4,000 more in refund than they paid in income taxes. In some cases, it is enough to cover not just their income tax but even the payroll taxes paid.
Buffett, while claiming he should be taxed at a higher rate, has been in a legal dispute for 10 years between the IRS and his company, Berkshire Hathaway, over $1 billion in back taxes. What hypocrisy! Why not just go ahead and pay it if he feels he is not taxed enough?
It needs to be repeated again and again that millionaires already pay the bulk of American income taxes. Tax statistics by The Tax Policy Center of the left-leaning Brookings Institute show that those in the top one-fifth of all taxpayers paid 89 percent of the taxes in 2010. At the very top of this group, the super rich, those with incomes of $1.9 million or more, paid 16.4 percent of the income taxes even though they are only one-one thousandth of the population.
Using this same data, Jeffrey Anderson noted in an article in the Weekly Standard recently that the top 0.1 percent of tax filers paid more in income taxes than the bottom 80 percent. Think about those two numbers for a while.
Millionaires are not stupid. Does the president think that these successful people will just stand by and let the government double down on the amount of taxes they are already paying? Millionaires will figure out, or at least their lawyers and accountants will figure out ways to avoid any new, large tax increases. This might include moving more money outside of America, investing in tax free bonds, or otherwise finding ways to shield their income. All of which will be negative for economic growth.
Further, the White House had to admit that the enactment of the so-called Buffett Rule would raise less than $5 billion a year in revenue, or about one-tenth of 1 percent of 2012 federal spending. This demonstrates that the Buffett rule is not about tax revenue but rather politics.
The president’s rhetoric regarding taxes is very harmful. It appears that he is using envy as a tool to gain political advantage in misleading the American people. Envy is not a sound basis for social and financial policy.
George Michael is a Williamsport resident who writes columns for The Herald-Mail.