The president is basing a new law off of Warren Buffett. This means that we are basing US tax policy on what is happening to the top 0.0000006% of people. Does that seem sensible?
Regardless, Warren has been trotting out this point about his secretary for years. Unfortunately, when Warren talks about Warren’s secretary, Warren lies about Warren’s secretary. Here is his definitive statement about the situation from as far back as I can find it:
Mr Buffett said that he was taxed at 17.7 per cent on the $46 million he made last year, without trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at 30 per cent.
The President says that those who defend this situation “ought to have to answer for it.” Fair enough. Short answer: Warren Buffet is lying. Much longer answer: 10 points.
- Most simply, Warren Buffett is almost definitely lying about the tax rate of his secretary. Now, it’s possible to pay any tax rate if you really want to, by paying more than is required. You can just send in a check. Since Warren apparently refuses to do that, let us dismiss that option for his secretary. The typical person making between 50-75k, according to this IRS tax data, pays an effective rate of about 14%. 14% is less than 30%. Even adding on payroll tax, it’s nowhere near 30%. CBO data, including payroll taxes, shows that someone making about $64,000 per year pays a total effective rate of around 14.3%. We asked an accountant to run the numbers in general for someone like Buffett's secretary. The results: if they were single, 14%. If married, 7.6%.
- Buffett is comparing two different taxes. One is a tax on income, one is a tax on investments. They are two different taxes on two different things. Want another scandal? Warren Buffett pays less in sales tax than his secretary does in income tax. We better write another law.
- Warren Buffett has already been taxed on that money. Here’s an oversimplification to explain what I mean.
You earn $100 in salary.
TAX #1: Uncle Sam takes $35, leaving you with $65.
You then invest that $65, and that investment earns 10% or $6.50.
TAX #2: Of that new $6.50, Uncle Sam takes another $1.
Now, add up the earnings: the original $100 + $6.50 = $106.50.
And, add up the taxes: $35 + $1 = $36.
On $106.50 in earnings, you were taxed $36, or 33.8%,-- about double the rate Warren Buffet claims he’s paying. This gets more complicated with margin, outside investment, and a million other variables, but this how it works in general. (Dividends are worse: you get taxed on initial income, the company gets taxed on their profits, then when they give you a slice, it gets taxed again.)
So, how does Buffett justify his low tax numbers? He acts as if TAX #1 never occurred. Then he tells you that the rate of TAX #2 is too low. It's a completely disingenuous shell game.
- Buffett is an exception to the rule of the mega rich. While he earns around 90% of his income at the lower rate through investments, the typical person who earns more than $10 million per year only earns about 38% of their cash at that rate. Sure, someone who is mega rich is an exception to the rule. But, Buffett is an exception to that exception. Basing a rule on his experience is not sober policy making.
- Buffett's secretary is an exception to the rule of secretaries. She/he makes $60,000 per year. While I'm not exactly blown away by Buffett's generosity in his pay-scale either, the average secretary makes about $33,000 per year. Instead of the 14% tax rate of Buffett's secretary, the typical secretary pays more like 10%. This information makes something like this, even dumber than you previously thought.
- Rich people pay far more than the middle class in both total dollars and percentage terms. Don’t take my word for it, listen to the Associated Press: “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...Households making between $50,000 and $75,000 will pay 15 percent of their income in federal taxes.” Those numbers aren’t even close to what Buffett is claiming. Did I mention he is lying? (Quick side note—a tax is nothing but a fee you pay to the government to run the structure that maintains society. In theory, each person has equal access to government services. Even in Buffett’s (false) example, he's claiming that he pays over $8 million, and his secretary pays $18,000 for the privilege of living here. Does that really sound so unfair even if it was true? (It is not.))
- Rich people already carry far more of the burden than the poor or the middle class. The top 10% of tax payers carry 73% of the income tax burden. The bottom 51% of tax payers carry 0%.
- The Buffett rule has nothing to do with wealth. The "problem" Obama is describing is a "problem" with professional investors, not rich people. To get a rate of 17.7% on your income as Warren Buffett, you have to earn roughly 90% of your earnings from investments. But, you don’t have to make tens of millions for this to happen. Anyone who makes 90% of their money from investments could theoretically pay right around 15% whether they earn $50,000 or $50,000,000. Yet, Obama just keeps talking about rich people. This is one way to be completely sure this is really about class warfare, not tax policy.
- Obama's rule doesn’t actually target people like Buffett. Forget everything we’ve talked about here for a second and strip things down to the core. The claims about secretaries are just false. But, in theory, someone making $1 million could complain that he pays a rate that is slightly higher than someone making $11 million. Those 7 figure earners are victims to the tyranny of the 8 figure earners! Cry for them! In other words, the really rich get slightly screwed as compared to the really REALLY rich. But Obama’s rule, just targets anyone making $1 million or more—the rule actually "screws" the people being "screwed" most by the “problem.”
- The rate on investments should be lower than the normal rate...for many reasons (see #3 and #10 for example). But in addition to those: when I go to work, I receive a salary. When someone earning their living through investments goes to work—they may LOSE money. It’s wonderful to focus on the ultra-rare person like Warren Buffett who is so successful that he/she is able to acquire tens of billions of dollars. But the average person who invests might just bet wrong and get hammered. When he/she bets right, it makes sense that he/she gets taxed at a lower rate. They’re playing a different game than you and I, and therefore pay a different tax.
- Lowering the capital gains tax, brings in more revenue. Even the media understands this. Charlie Gibson, not a guy who is up for a job at the Heritage Foundation, asked Obama this question in one expand=1] of his debates with Hillary Clinton:
CHARLIE: Alright, you have however said you would favor an increase in the capital gains tax. As a matter of fact you said on CNBC and I quote, “I certainly would not go above what existed under Bill Clinton which was 28 percent”. It’s now 15% that’s almost doubling if you went to 28%. But actually Bill Clinton in 1997 signed legislation that dropped the capital gains tax to 20 percent and George Bush has taken it down to 15% and in each instance when the rate dropped, revenues for the tax increased. The government took in more money and in the 1980s when the tax was increased to 28% revenues went down. So why raise it at all? Especially given the fact that 100 million people in this country own stock and would be affected?
OBAMA: Well Charlie what I said is that I would look at raising the capital gains tax for purposes of fairness.
Obama is claiming that he wants this change to create jobs in a jobs bill, but he's really trying to implement his version of "fairness." Those are two competing interests, and the unemployed will feel the weight of his indecision.
I suppose some of these aren't Warren's lies, instead just lies/falsehoods/exclusions/spin by the media--but you get the point.
By the way---has anyone else noticed Buffett’s slight change in argument? He’s been arguing forever that he paid a higher rate than his secretary. His latest op-ed that started this up all over again never mentions his secretary. Obama keeps saying it. Warren does not. He's now saying he's taxed more than other people in his office. While I assume that his “secretary” works in his office, when someone is being this slimy, I wouldn’t be surprised if he’s attempting to intentionally weasel himself out of the original claim. Sort of how he's trying to weasel out of his taxes.
*I was initially going to use this post to take on the ridiculous Politifact "true" rating for Warren Buffett. But, they are barely defending that themselves anymore, so I'll give them a pass.