Jacoby on Buffett

http://www.futureofcapitalism.com/2011/08/jacoby-on-buffett

Columnist Jeff Jacoby inadvertently highlights one of the many ways in which Warren Buffett's New York Times op-ed was misleading. Mr. Jacoby writes:

Buffett lamented that the $6,938,744 he forked over in federal income and payroll taxes in 2010 amounted to just 17.4 percent of his taxable income. "What I paid," the world's most famous investor observed, "was . . . actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent."

Buffett has not made his employees' tax returns public, but the federal tax burdens he ascribes to them appear to be highly atypical. According to the Congressional Budget Office, the overall federal tax load shouldered by Americans - comprising income, payroll, corporate, and excise taxes - is quite progressive. The budget office reported last summer that "households in the bottom fifth of the income distribution paid 4.0 percent of their income in federal taxes, the middle quintile paid 14.3 percent, and the highest quintile paid 25.1 percent. Average rates continued to rise within the top quintile: The top 1 percent faced an average rate of 29.5 percent." If Buffett's numbers are right, his employees must be among the highest-taxed workers in America.

The explanation here is that the CBO is referring to total income, while Mr. Buffett was referring to taxable income. Mr. Buffett's employees probably max out their 401K contributions, have home mortgages for which they take deductions, and make charitable contributions for which they take deductions. They may own municipal or Treasury bonds on which the interest is tax-free. They pay Nebraska state income tax of 6.84% on income above $54,000 a year, for which they take federal deductions. They may have taken child-care or tuition tax credits or deductions for their children or spouses that phase out for higher-income taxpayers. They aren't "among the highest-taxed workers in America"; rather, using federal taxes paid as a percent of taxable income rather than as a percent of total income generates a misleading picture of their tax liability.

Mr. Jacoby also highlights another under-appreciated point: "Buffett doesn't argue that his workers' federal taxes should be cut. He demands that his own be raised."

by Editor  |  Aug 24, 2011 at 10:22 am Related Topics:  Taxes, Warren Buffett receive the latest by email: subscribe to the free futureofcapitalism.com mailing list