In his now-famous New York Times article “Stop Coddling the Super-Rich” last summer, Warren Buffett made the following claim:
“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% 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% to 41% and averaged 36%.”
Buffett then went on to say that a “billionaire-friendly Congress” had been coddling him and his super-rich friends long enough, and proposed immediate tax increases on the “super-rich.”
New data just released by the CBO on federal taxes paid in 2009 allow for a fresh look at Buffett’s claims about tax burdens. The top chart above shows average tax rates by income groups in 2009 for individual income taxes and payroll taxes and the middle chart shows average tax rates by income groups for individual federal income taxes only. The bottom chart shows the share of federal income taxes paid by various income groups.
Here are some observations:
1. Warren Buffett’s tax situation is certainly not typical for the “super-rich” taxpayers, because the average federal tax rate for those in Buffett’s top 1% group was 23.5% compared to Buffett’s rate of only 17.4%. As has been well-documented, Buffett pays a lower-than-average tax rate for the top 1% because he receives most of his taxable income as dividends and capital gains – both taxed currently at only 15% – and not as ordinary income, which would be taxed as high as 35%.
2. More importantly, it seems highly unlikely that Buffett’s secretary and other co-workers are paying effective federal tax rates of 33-41%. It’s important to note that Buffett has only mentioned federal income taxes and payroll taxes, and not state income taxes, and has specifically reported his 17.4% rate for only federal taxes. Given the tax data in the chart above, it’s either the case that: a) Buffett’s assessment of his co-workers’ tax data is inaccurate, or b) all of his office workers faced extremely unusual tax situations last year, which are not at all representative of the taxes paid by typical Americans in the middle income quintiles. If the top 1% group with incomes averaging more than $1 million paid an average federal tax rate of 23.5% in 2009, it’s seems impossible that Buffett’s secretary and co-workers were paying an average tax rate of 36%.
3. Our federal tax system is already highly progressive – higher income groups pay higher rates for federal taxes as the top two charts above show. And the progressivity of federal taxes is driven by the progressivity of the individual income tax system as can be seen in the middle chart. In 2009, the lowest income quintile’s average federal income tax rate was -9.3%, meaning that Americans in the bottom 20% by income received more in refundable tax credits than they paid in income taxes. Likewise, members of the second income quintile benefited from a negative average income tax rate of -2.3% because their refundable tax credits exceeded their tax payments.
4. As a result of our highly progressive income tax system, the top 20% of Americans in 2009 paid almost all of the federal taxes collected — 94.1% — and the top 1% paid almost 39%! The bottom two quintiles were net tax collectors, the middle quintile paid almost nothing – only 2.7% – and the fourth quintile paid only 13.4% of federal taxes collected.
Bottom Line: Buffett’s anecdotal “evidence” that the federal tax system is regressive (his secretary and lower-paid employees pay a higher federal tax rate than he does) is not typical and can be dismissed as a special case or a miscalculation. And we can also dismiss Buffett’s notion that the “super-rich” are being coddled and deserved to be taxed more. When the top fifth of Americans are paying more than 94% of the total federal income tax burden, we should be thanking the “super-rich” profusely and not threatening to burden them with an even greater share of the nation’s taxes.