At a conference on elections at the University of Maryland School of Law, Dorothy Brown gave a very interesting presentation on tax issues and the presidential elections. She began with an anecdote that Warren Buffett used at a fundraiser last year, and which made the round of some of the blogs. In 2006, Warren Buffett had $46 million of taxable income, while is secretary earned $60,000. Warren Buffett’s tax rate was 17.7% and his secretary’s was 30%. Although he surely did not object to his relatively lower tax rate, Buffett made it a point to emphasize that he was not deliberately trying to avoid paying higher taxes, and hence did not utilize tax shelters. Of course Buffett’s taxable income stems from capital gains, while his secretary’s taxable income stems from wages. As Dorothy Brown pointed out, however, Buffett’s point appeared to be that the tax system favored wealth over wages. For people who believe that giving a preference to wealth creation is critical to stimulating the economy and thereby enhancing the market, Buffett’s comments may not be viewed as troubling. However, they certainly reflect some inequities in the system. After an evaluation of all the tax plans of the presidential candidates (at least all of those who were in the race last week), Brown concluded that the tax plans advanced by Senator Obama and Senator Edwards appeared most likely to address Buffett’s concerns because they would increase the capital gains rate, and Obama’s plan would create new tax credits for workers aimed at offsetting payroll taxes. To be sure, your presidential decision may not be driven be either tax concerns or Warren Buffett. However, Brown’s talk raised some interesting points of comparison. Brown also noted that Buffett’s comments were made at a $4600 fundraiser for Senator Clinton, whose tax plan was apparently one of the ones least likely to resolve the issues he raised.
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1. Posted by Anon on January 30, 2008 @ 9:02 | Permalink
I've heard the Buffett/secretary story numerous times, but I've never heard anyone bring up the fact that Buffett's wealth is really taxed twice--once through corporate taxes and then through capital gains taxes. So really, Buffett is contributing more than 17%. Or am I missing something?
2. Posted by kjkjh on January 30, 2008 @ 15:34 | Permalink
Another thing that's weird about this story: If the secretary makes 60K a year and is single, she'd be in the 25% bracket, not the 30% bracket. If she's married, she'd be in the 15% bracket.
http://www.moneychimp.com/features/tax_brackets.htm
If she were in the 25% bracket, her "tax rate" would really be much lower than 25% because her first $7,000 of income would be taxed at a 10% rate, and her next $23,000 of income would be taxed at a 15% rate. In fact, her overall tax rate would be 21%.
The only way she would have a 30% tax rate is if she had a husband whose income put them in the 33% bracket, which would mean that their combined income would have to be more than $150K.
Of course, this assumes that by "tax rate", Buffet was referring to federal tax rate, and not the combination of all taxes (state, local, etc) paid. But since we're talking about the Presidential race, and the president only affects federal taxes, it's reasonable to assume that Buffet was referring to federal taxes, no?
3. Posted by jhkjh on January 30, 2008 @ 15:38 | Permalink
Oh and I forgot to mention that the secretary would presumably get some sort of deduction from her taxes that would lower them even further. If she used the standard deduction, she could deduct about $5,000.
http://en.wikipedia.org/wiki/Standard_deduction
That would mean her overall tax rate wouldn't even be 21%; it'd be a little less than 12%. She'd have an even lower tax rate if she itemized deductions.
How can someone as smart as Buffet make a statement that's so misleading? Or am I missing something?
4. Posted by sdfsfd on January 30, 2008 @ 15:40 | Permalink
Oh, I did calculate the standard deduction wrong. It's really only about $1250, which means her tax rate would be 17.5%. Oops. Still, that's a lot lower than what Buffet said.
5. Posted by Lawrence Cunningham on January 30, 2008 @ 20:37 | Permalink
At what point do amounts matter more than percentages? There is an enormous difference between contribuing to the annual public fisc $18,000 versus $8,000,000 (and the likelihood of differential use of resulting governmental services).
I am likely missing a lot in this small query and must acknowledge, as many know, that Warren Buffett is a friend of mine and I've published a collection of his Essays and featured him in a Cardozo Law Review conference a decade ago.
So I register this query with admiration and affection. But I'm not sure about the substance of the argument focused on rates, not dollars, at least at this level.
6. Posted by hardy on July 15, 2008 @ 0:06 | Permalink
The tax rate Warren is using includes wage taxes, not just income taxes. That's how it get's to 30%.
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