Warren Buffet Pays 17.7% Tax Rate; His Employees Pay 32.9%
The article cites Warren Buffet himself as complaining that he unfairly pays less taxes (about 17.7%) than his secretary (about 32.9%). The author then links to 4 other article commenting on the same issue. I found Greg Mankiw's remarks to be the most insightful.
Essentially, Buffet's observations are misleading for two primary reasons:
- Social Security Taxes
- Pre-Capital Gains Taxes
As Mankiw points out, the vast majority of Buffet's immediate income is taxed as capital gains, whereas his secretaries immediate income will be taxed as regular income. It appears that Buffet's figures are really based primarily on this fact (15% capital gains tax vs. a 33% rate, including 12% Social Security taxes, for his secretary).
If my memory serves me correctly, social security taxes max out at around $100k. Thus, the money Buffet makes over $100k, which is most of his income, will essentially diminish the effect of that 12% on his income to a negligible amount. Accounting for this fact, his secretaries comparable taxes were really only around 21%, just 4% more, not 16% more, as Buffet claims.
Furthermore, as Mankiw points out, Buffet's capital gains do not come from nothing. They come from assets he owns, such as businesses, which are taxed at a corporate rate of about 35%. Thus, the capital gains tax is not really a 15% tax on income, but a 35% + 15% of the remainder, effectively a double tax. This is most easily seen in the case of dividends. When a stock holder receives dividends, he receives them proportionally to his ownership in a business, which is taxed before he gets paid. Thus, his assets are taxed at about 35% in the corporate pool, and then he gets taxed another 15% (maximum) on the 65% remaining when it comes out of the pool and into his directly controlled assets. Hardly a mere 15% tax and probably enough even with multiple caveats to actually place Buffet's real tax rate significantly higher than his secretaries.
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