The A.P. Fact Checks The “Buffett Rule” And Finds Its Premise Flawed

As a supplement to my post from yesterday, the Associated Press is out with some fact checking on the premise of the so-called “Buffett Rule,” and found no support for the idea that secretaries are paying a higher tax rate than the mega-rich bosses:

In his White House address Monday, Obama called on Congress to increase taxes by $1.5 trillion as part of a 10-year deficit reduction package totaling more than $3 trillion. He proposed that Congress overhaul the tax code and impose what he called the “Buffett rule,” named for billionaire investor Warren Buffett.

“Warren Buffett’s secretary shouldn’t pay a higher tax rate than Warren Buffett. There is no justification for it,” Obama said. “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.”

Buffett wrote in a recent piece for The New York Times that the tax rate he paid last year was lower than that paid by any of the other 20 people in his office.

This year, households making more than $1 million will pay an average of 29.1 percent of their income in federal taxes, including income taxes and payroll taxes, according to the Tax Policy Center, a Washington think tank.

Households making between $50,000 and $75,000 will pay 15 percent of their income in federal taxes.

Lower-income households will pay less. For example, households making between $40,000 and $50,000 will pay an average of 12.5 percent of their income in federal taxes. Households making between $20,000 and $30,000 will pay 5.7 percent.

The latest IRS figures are a few years older — and limited to federal income taxes — but show much the same thing. In 2009, taxpayers who made $1 million or more paid on average 24.4 percent of their income in federal income taxes, according to the IRS.

Those making $100,000 to $125,000 paid on average 9.9 percent in federal income taxes. Those making $50,000 to $60,000 paid an average of 6.3 percent.

Obama’s claim hinges on the fact that, for high-income families and individuals, investment income is often taxed at a lower rate than wages. The top tax rate for dividends and capital gains is 15 percent. The top marginal tax rate for wages is 35 percent, though that is reserved for taxable income above $379,150

(…)

The data tell a different story. On average, the wealthiest people in America pay a lot more taxes than the middle class or the poor, according to private and government data. They pay at a higher rate, and as a group, they contribute a much larger share of the overall taxes collected by the federal government.

There may be individual millionaires who pay taxes at rates lower than middle-income workers. In 2009, 1,470 households filed tax returns with incomes above $1 million yet paid no federal income tax, according to the Internal Revenue Service. That, however, was less than 1 percent of the nearly 237,000 returns with incomes above $1 million.

So, whether you’re talking tax rates, aggregate payments, or share of total taxes paid, the “rich” pay more than the middle class or the poor, which is how it works under a progressive income tax. Might there be an anecdotal exception out there? Possibly, but in a nation of 300,000,000 people, there are always going to be exceptions to the rule, that doesn’t mean it makes sense to either assume their are representative of the population as a whole, or make policy based on their unique situations. It would also help if the President and Buffettt had gotten their facts correct before pontificating. But, then, what fun would that be?

 

FILED UNDER: Deficit and Debt, Politicians, Quick Takes, Taxes, US Politics
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. Hey Norm says:

    I’m sure Buffett was lying.

  2. John Peabody says:

    How I dearly wish that this article could be read by all. So many people do not understand the concepts, this this is just…not…that…hard.

  3. Sam says:

    Has Buffett given Obama permission to put his name on this POS bill and if so for what in return?

    More Chicago Pay to Play going on?

  4. Sam says:

    Right after going after the rich’s tax money, he went after their campaign money at $35,000 a person.

  5. john personna says:

    Why do you straight up lie in your titles?

    The data tell a different story. On average, the wealthiest people in America pay a lot more taxes than the middle class or the poor, according to private and government data. They pay at a higher rate, and as a group, they contribute a much larger share of the overall taxes collected by the federal government.

    There may be individual millionaires who pay taxes at rates lower than middle-income workers. In 2009, 1,470 households filed tax returns with incomes above $1 million yet paid no federal income tax, according to the Internal Revenue Service. That, however, was less than 1 percent of the nearly 237,000 returns with incomes above $1 million.

    The Buffett rule is not about averages, it is about those individuals.

  6. john personna says:

    @John Peabody:

    If it’s not that hard, why do so many people get it wrong?

    The “carried interest” tax rate is a narrow thing, used by just a few fund managers, but among those few are people who make fantastic incomes, in the 10s of millions of dollars, and who pay special, low, tax rates.

    Doug has either fallen into a trap, or is making one, saying that since the rich on average pay a lot of tax, this specific loophole for wall street managers should be ignored.

    Serious?

  7. Sam says:

    Too bad AP was not looking into and fact checking Obama 3 years ago.

  8. Trumwill says:

    @john personna: How does the Buffett rule work, exactly? I did a lookaround and all I found were vaguaries.

  9. Sam says:

    @Trumwill:

    You may have to wait until Obama’s next vacation is over.

  10. john personna says:

    @Trumwill:

    I just looked too. I thought I read about a week ago that it would be a back-up rate, to make sure that people above $1M paid no less than some percentage (26%?) of AGI. Looking today I see less detail. Maybe it is in flux.

    But for what it’s worth, such an overriding rule would probably be easier to propose than a list of loopholes that should be closed. I mean, look what happened with the jet thing.

  11. @john personna:

    Making tax policy based on isolated individual cases is insane.

    Has the Obama Administration even given an estimate of how much revenue this “Buffett Rule” would generated? Of course they haven’t, because it isn’t about generating revenue, it’s about whipping up the old Democratic rallying cry of “Soak The Rich” or as they now call it “fairness”

  12. Sam says:

    @Doug Mataconis:

    Seems like the mans bag-o-tricks is running empty and he must rely on the old tried and true class warfare.

  13. MBunge says:

    @Doug Mataconis: “Making tax policy based on isolated individual cases is insane.”

    1. Virtually ALL libertarian complaints about regulation are based on isolated individual cases.

    2. So, you can’t actually defend the policy Obama is pointing out, but you still resent Obama doing so and seemingly resist any change to that policy because…?

    Mike

  14. Mbunge,

    Obama is making the argument that “millionaires and billionaires” are paying a lower tax rate than “secretaries.” For the vast majority of cases, this is demonstrably false. That’s all that matters.

  15. Boyd says:

    So if Warren Buffett is taking advantage of an unfair loophole to push his effective tax rate below that of his staff members, then we need to close the loophole, not raise taxes on folks that don’t (or can’t) take advantage of that same loophole.

    @john personna: The approach you describe sounds a lot like AMT, and you know what a nightmare that has been.

  16. David M says:

    Unless I’m reading this wrong, FICA and capital gains taxes aren’t included in the calculations used in the fact check, are they?

  17. MBunge says:

    @Doug Mataconis: “Obama is making the argument that “millionaires and billionaires” are paying a lower tax rate than “secretaries.” For the vast majority of cases, this is demonstrably false. That’s all that matters.”

    1. Phrases like “demonstrably false” don’t belong in sentences that also include phrases like “the vast majority of cases”. Try this on for size. “It is demonstrably true that Republicans are either frequenters of prostitutes or repressed homosexuals, in the vast minority of cases.”

    2. What matters is that there is NO WAY we will ever get our debt and deficit problem under control with some increase in revenue. If you think otherwise, you are demonstrably foolish.

    Mike

  18. @MBunge:

    Except the President isn’t framing the “Buffett Rule” as deficit reduction he’s framing it as some ridiculous argument about fairness to solve a problem that doesn’t exist.

    And if he were really into a tax plan that promotes economic growth and is equitible, he’d be looking at the tax plan that the Simpson-Bowles Commission came up with, or the one that Jon Huntsman released a few weeks ago. This is campaign fodder, that’s all.

  19. MBunge says:

    @Doug Mataconis: “Except the President isn’t framing the “Buffett Rule” as deficit reduction he’s framing it as some ridiculous argument about fairness to solve a problem that doesn’t exist.”

    Move the goalposts much? The President is making an argument that the wealthiest Americans need to pay more in taxes to solve our debt and deficit problem, especially if we’re going to ask poorer Americans to make do with less government assistance and, let’s be honest, most especially if we’re going to eventually raise taxes on the non-wealthy to get the budget balanced.

    Yet, when the President points out a ridiculous example of how rich people can wind up paying a smaller tax burden than their secretaries, folks like you become practically hysterical EVEN THOUGH YOU CAN’T ACTUALLY DISPROVE OR EVEN DISAGREE WITH THE PRESIDENT ON THAT PARTICULAR EXAMPLE.

    Unless you think, despite all economic and historical evidence to the contrary, that current levels of taxation are the absolute maximum any society should impose and taxes should never again be raised any amount for any reason in any circumstance…what the hell are you carrying on about?

    Mike

  20. MBunge,

    I said nothing close to what’s in your last sentence, and when the President puts forward a serious comprehensive tax reform proposal like the one the Commission he appointed last year proposed, rather than a slogan for 2012, I’ll take a look at it and comment appropriately.

  21. MBunge says:

    @Doug Mataconis: Let’s review.

    1. I point out that what the President is doing with the Buffet example is no different than what libertarians have been doing with isolated, individual examples to argue against federal regulations. You have no response.

    2. I point out that you’re attacking the President’s argument with language that’s inappropriately absolute. You have no response.

    3. I ask you if you believe the current level of taxation is the absolute maximum any society should impose and taxes should never be raised by any amount for any reason in any circumstance. You utterly fail to deny that’s what you actually believe.

    4. Unless you have a specific objection to closing the Buffet loophole or you do believe that taxes should never again be increased, what the hell are you carrying on about?

    5. All available evidence is that the President put forward serious, comprehensive tax reform as part of the “Grand Bargain” during the debt ceiling nonsense. The Republicans walked away from that and, to this point, have put forward ZERO credible tax reform proposals. Do you think serious, comprehensive tax reform can be achieved that DOESN’T raise the historically low levels of taxes now being paid by the richest Americans?

    Mike

  22. john personna says:

    @Doug Mataconis:

    Making tax policy based on isolated individual cases is insane.

    Huh? This is a reason to maintain a narrow advantage for some few?

    @Boyd:

    The approach you describe sounds a lot like AMT, and you know what a nightmare that has been.

    I feel like it’s just you and me, buddy. We’d level the playing field so that such “catch up” rules weren’t needed.

    Too bad it isn’t us.

  23. john personna says:

    Please note that a “catch up” rule does not move the top marginal rate at all. It just, as a final check, makes sure that no one has found a way to beat that marginal rate by too much.

    I’m kind of sympathetic to people who just buy $10M worth of tax free municipal bonds, but you know, should they really pay no income tax for the rest of their lives?

  24. Mbunge,

    You have consistently failed to address any of the points I’ve raised, why should I bother addressing yours?

    And, for the record, you’re completely off base in your description of libertarian critiques of government policy, my language is entirely appropriate since all POTUS is doing is engaging in a populist screed, and I answered your last question in my previous response. Read it again.

  25. @john personna:

    It’s a reason for comprehensive tax reform, not populist screeds like the one the President issued from the Rose Garden yesterday

  26. Trumwill says:

    For people who don’t like methodology the Fact Check is using, feel free to take a look at numbers put forth by Citizens for Tax Justice (a group dedicated to a more progressive income tax) or the Congressional Budget Office, which (a) looks at all forms of taxation and (b) starts from “comprehensive household income” which includes both non-taxable and taxable income.

    Both demonstrate that, in the aggregate, the top 1% of earners pay considerably more than the middle 20%.

    This does not mean that there are some people (including Mr. Buffett) who are paying considerably less, nor does it mean our system of taxation is progressive enough (CTJ is making the exact opposite argument), but it does suggest that Obama’s underlying complaint (that it is broadly the case that the super-rich pay too little compared to middle earners) is flawed.

  27. john personna says:

    @Doug Mataconis:

    It’s a reason for comprehensive tax reform, not populist screeds like the one the President issued from the Rose Garden yesterday

    Then I think you are arguing against your own, deeper, philosophy.

  28. I heard the speech, John. I know what I heard.

    Like I’ve said, if the President really wanted to present a comprehensive tax reform plan then he can look at Simpson-Bowles. Or was that whole Commissions of his just another show piece?

  29. MBunge says:

    @Doug Mataconis: “You have consistently failed to address any of the points I’ve raised, why should I bother addressing yours?”

    What points? As I’ve asked before, what are you carrying on about? The President is proposing that the richest Americans need to pay more in taxes, particularly at a time when we are and will continue to ask non-rich Americans to sacrifice in order to get our debt and deficit under control. You seem to have some objection to that, but hide behind phrases like “populist screed” instead of stating them plainly.

    And by the way, if you think what the President said yesterday comes even close to being a “populist screed”, you have no reason to complain if people assume you don’t think any taxes should ever be raised any amount at any time in any circumstance.

    Mike

  30. john personna says:

    @Doug Mataconis:

    I heard the speech, John. I know what I heard.

    I guess we can wonder about that. I mean, what if Obama use too incendiary of language to introduce something that was actually …. reasonable. Would he trick people into defending rich-man’s loopholes?

    (I personally would give most kudos to those who saw past the rhetoric.)

  31. dude says:

    Investment income is taxed at 15%…. Rich folks tend to have a lot of investment income… in fact, the bulk of income earned by rich folks is investment income (generally speaking). They should pay the standard income tax rate that everyone else pays.

    Class warfare or fairness?

    Ignoring this loophole makes is easy to lie.

  32. Moderate Mom says:

    @dude: @dude:

    What you seem to forget is investment income has been taxed once already, usually at the corporate rate. That’s the reason capital gains are taxed at a lower rate than other forms of income. Even at the lower rate, it is a form of double taxation.

  33. Herm Weiss says:

    @MBunge: What is missing is that Buffet’s investment firm has been fighting the IRS for years over unpaid taxes. That makes Buffet a hugh hypocrite. So why did he do this? it smells fishy. Someone in the media needs to investigate this whole thing more throughly.

  34. CommonSense says:

    Anecdotal evidence? No. “statistics from the Internal Revenue Service show that the 400 wealthiest taxpayers pay tax rates of less than 20 percent.”
    http://www.politifact.com/truth-o-meter/statements/2011/aug/18/warren-buffett/warren-buffett-says-super-rich-pay-lower-taxes-oth/

    Buffett and Obama were talking about mega rich who make most of their money off investment income, not those who make their millions from earned income. I accept that the author may not have had easy access to figures that break out investment income from earned income, but the information he did use leads to a completely inaccurate conclusion.
    http://www.ctj.org/pdf/buffettrulefactsheet.pdf
    According to the ITEP model which is based on a very large sample of actual federal tax returns (690,000 records is a very large sample of all taxpayers) someone who makes $10 million a year in investment income will pay 17.2% in federal income plus payroll taxes, almost identical to the 17.4% figure in Warren Buffett’s article. Those making $1 million or more in investment income will pay 21.0%. Is talking about people who make most of their money from investment income a tiny anecdotal exception? No. Based on this same IRS tax data in the 690,000 ITEP records, taxpayers who make $10million or more in investment income outnumber those who make $10 million or more in earned income, both in number of filers and in reported income. (see first two columns of table in fact sheet). Those 0.053% of all U.S. taxpayers who make $1 million or more in investment income are 5.25% of total reported U.S. income. It is this 5.25% of total reported U.S. income that Doug Mataconis is prepared to sweep under the rug as an anecdotal exception, all because he didn’t have access to the relevant information needed to accurately answer the question. Politifact could find the relevant information, Doug Mataconis didn’t. I guess that shows who to check for fact checks next time.

  35. CommonSense says:

    One of the main reasons why the federal income tax is so progressive is because state and local sales taxes and property taxes are both regressive. The table that follows may not be exact because I’m combining 2007 state and local figures from Institute on Taxation and Economic Policy (ITEP) with 2007 federal figures from the Congressional Budget Office (CBO). However it’s close enough to accurately give you the big picture of tax burdens by income.

    …………………..Combined…Federal…..State/Local
    Lowest 20%………..15.0%………..4.0%……….11.0%.
    Second 20%………..20.7%……….10.6%………10.1%
    Middle 20%………..24.1%………..14.3%………..9.8%
    Fourth 20%…………26.6%……….17.4%………..9.2%
    Top 1%………………..36.0%……….29.5%……….6.5%

    If I apply the same top 1% state/local tax burden to the federal tax burden of those making $10 million or more in investment income from the Center for Tax Justice fact sheet, we see the Buffett Rule folks:
    ……….%………………..23.7%……….17.2%……….6.5%

    Since state-local tax burden goes steadily down with increases in income, the 6.5% for those top 1% making $476,000 or more is almost certainly too high for those making $10 million or more. I won’t speculate how much lower but these numbers will be overstated. According to the best information I can find then, the average taxpayer with over $10 million in investment income has a lower tax burden as a percent of income than a household in the middle quintile or upper-middle quintile.

    Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, Averages for All States p. 118. http://itepnet.org/whopays3.pdf
    Effective Federal Tax Rates for All Households, by Compreshensive Household Income Quintile, 1979-2007.
    http://www.cbo.gov/publications/collections/tax/2010/average_rates.pdf

    Warren Buffectt’s Effective Tax Rate is Typical of Taxpayers with $10 million or more of investment income.
    http://www.ctj.org/pdf/buffettrulereport.pdf

    *I left out the following two rows in my table because the ITEP state-local tax burden data is for “next 15% and “next 4%” and Top 1%, while the CBO federal income tax, payroll tax, and other federal tax data only gives Top Quintile, Top 5%, and Top 1%. So the federal figures for these two come close but won’t be exactly right.
    …………………..Combined…Federal…..State/Local
    Next 15%…………..33.9%……….25.1%*……….8.8%
    Next 4%…………….35.6%……….27.9%*……….7.7%