Fact-Checking: The Buffett Rule Doesn’t Add Up

Guest Author: Mark J. Perry, Ph.D. (see below) – originally posted on The Enterprise Blog

Inspired by Warren Buffett’s frequent claims that he pays federal taxes at a lower rate that his secretary, President Obama proposed a new tax hike on millionaires called the “Buffett Rule” as part of his deficit-reduction plan.

“Warren Buffett’s secretary shouldn’t pay a higher tax rate than Warren Buffett,” the president declared. “There is no justification for it. It is wrong that in the United States of America, a teacher or a nurse or a construction worker who earns $50,000 should pay higher tax rates than somebody pulling in $50 million.”

As the Wall Street Journal pointed out, “There’s one small problem: The entire Buffett Rule is false,” and it referred to Buffett’s claims that CEOs pay lower tax rates than their secretaries as “Omaha hokum.” AEI’s Alan Viard explains here that the Obama administration is basing its tax proposal and the Buffett Rule on a factual statement that doesn’t hold up. Even the Associated Press finally got around to fact-checking the Oracle of Omaha’s math and reported that “President Barack Obama says he wants to make sure millionaires are taxed at higher rates than their secretaries. The data say they already are.”

Federal tax data from the Internal Revenue Service (IRS) and the Congressional Budget Office presented in the table and chart below confirm that the “Buffett Rule” really is “Omaha Hokum”:

The table above summarizes average federal income tax rates (as a share of taxable income) paid in 2009 by individuals at income levels from $10,000 to $10 million (IRS data here). A secretary earning $50,000 would be paying an average federal tax rate of about 11 percent, compared to the 26.3 percent tax rate on the “super-rich” earning $10 million or more. Any CEO earning income above $200,000 would be paying federal income taxes at a rate of at least 24.6 percent, or more than twice the rate of a secretary earning $50,000.

To be fair, in Buffett’s frequently cited New York Times editorial in August, he also included payroll taxes when he claimed that his 17.4 percent tax rate was far below the 36 percent average rate for the 20 employees in his office. The IRS only provides tax data for federal income taxes, but the Congressional Budget Office reports average tax rates by income groups for all federal taxes including payroll taxes, and those data are displayed below for 2007 (the most recent year available).

Even when including payroll taxes, the claims by Buffet and Obama that secretaries pay higher tax rates than CEOs are not consistent with the factual evidence. For the CEOs in the top 1 percent earning an average of almost $2 million annually, they are paying an average federal tax rate of 29.5 percent, which is more than twice the tax rate of those in the middle income quintile earning an average of $64,500.

Bottom Line: The data in the table and chart above show that the U.S. federal income tax system is already highly progressive (as it’s intended to be, and not regressive as Buffett and Obama seem to imply)—higher income groups do pay taxes at a higher rate as a share of their income than lower income groups, and that applies even if we include payroll taxes. Obama has claimed that raising taxes on the rich is “not class warfare, it’s math.” Unfortunately, the math behind the “Buffett Rule” just doesn’t add up. Fortunately, some serious fact-checking has finally begun to expose the “Omaha Hokum.”

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Mark J. Perry, Ph.D. is Visiting Scholar at The American Enterprise Institute and Professor of Finance and Business Economics, School of Management, University of Michigan-Flint. He writes at Carpe Diem. VITA

2 replies on “Fact-Checking: The Buffett Rule Doesn’t Add Up”

  1. demand side – – –

    We have asked Berkshire Hathaway for a reply but I don’t know if the request will get to the right person. I may try the telephone next week. I have had good luck reaching people like Bill Gross and Robert Reich that way. In the meantime I have been looking at the CBO and the Census data on before tax income and the numbers are not consistent. The CBO counts more income sources than the census does, yet the census household income figures are consistently larger for the third and fourth quintiles (fifth is highest) for the years 1979-2007.

    I don’t know that I can provide any meaningful analysis until I know what the real household income figures are.

    John Lounsbury

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