Thursday, January 26, 2012

Warren Buffett's Apples and His Secretary's Oranges

   Warren Buffett's claim that his secretary's tax rate is 35% and his only 17% is such an apples to oranges comparison that it would be worth your while to add the word "specious" to your vocabulary just so you can use it in this discussion.  It's difficult to even know where to begin.
   First, if Buffett's secretary truly makes $60,000 as he apparently stated, Buffett has rigged the results by adding her payroll taxes, even including the employer's "contribution" as he stated in this letter to Congressman Huelskamp.  The "tax holiday" has reduced this to 13.3% for 2011, but since Buffett is referring to 2010 in his letter, I'll use 15.3%.  This means Buffett is adding 15.3% of $60,000, or $9,180, to whatever his secretary's federal taxes are to come up with the 35% rate.
   Second, as he also stated in his letter to Huelskamp, he is using not adjusted gross income, but rather taxable income as a base figure.  This means that his secretary, filing as single (I do not know her status,) would have the standard deduction ($5,800) and one exemption ($3,700), reducing her taxable income to about $50,000.  This figure is probably high since it takes no other exemptions or deductions into account, but based on $50,000, her federal taxes would be $8,631 according to IRS tax tables.  This $8,631 plus the $9,180 in payroll taxes comes to about 35.6% of $50,000, not far from what Buffett said.  But, as I said, this assumes filing single, very minimal tax exemptions, not itemizing deductions, and also no tax credits.  This seems far from the "typical" tax payer and only gets to the 35% using some payroll tax gymnastics.
   Turning to Buffett's rate now, he states in his letter that his payroll taxes were $15,300 for the year.  This almost sounds like he is rounding off since 15.3% of $100,000 (the approximate cap for Social Security taxes was actually $106,800 in 2010) is exactly $15,300.  But perhaps Mr. Buffett has simply structured his compensation such that his income subject to payroll taxes is exactly $100,000.  If Buffett's entire income were subject to social security and medicare, of course his taxes would be astronomically higher.  We cannot truly know what that figure would be since his letter to Huelskamp reports only his adjusted gross income, not his total gross income (such as his secretary's $60,000) on which payroll taxes are calculated.  But even if we use adjusted gross income of $62,855,038 (less the $100,000 on which he did pay payroll taxes), his additional tax burden would be $9,601,520.  Added to his $6,923,494 in federal taxes, his total taxes would be $16,525,014.  Taken as a percentage of his taxable income of $39,814,784 (as Buffett did in calculating his secretary's 35% rate,) this comes to 41.5%.
   So Buffett's claims are... ready for it?... specious!  What he ends up arguing for is the lifting of the social security cap as well as the application of social security and medical taxes to non-wage income - and is anyone talking about that?  If politicians do take him seriously and make those changes, Mr. Buffett will get his apparent wish to pay much more to the government.  Then we'll get to see how he likes them apples.

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