Thursday, September 22, 2011

Thoughts on Taxes: IRS Tax Rates are Not Binding and Buffett's Tax Situation is An Extreme Outlier

Here's a thought on taxes: Perhaps it receive greater attention that the statutory IRS tax rates at any given time are not legally-binding, maximum tax rates, it's more the case that the IRS rates are the legally-required minimum tax rates enforced by the IRS.  Advocates of higher tax rates like Warren Buffett seem to feel constrained by the current tax code, as if the current tax rates are legally-binding maximum rates, when that is not the case.  Maybe the IRS should clarify that it only enforces legally-required minimum tax rates, but these rates are not binding and can be adjusted upward by any taxpayer who voluntarily chooses to pay taxes a higher rate?

Update: Another thought... I think Warren Buffett distorted and misrepresented the tax issue by using himself as an example, implying that his case as a CEO paying a lower tax rate (17.4%) than his secretary was typical, when that is not the case.  Buffett’s case is an extreme outlier and not at all typical of a CEO because: a) Buffett takes only a $100,000 salary, and b) gets about $40 million of income annually from dividends and capital gains taxed at 15%.  

That’s how Buffett reports a 17.4% tax rate, but he never explained in his NY Times article (or elsewhere) that his case is NOT typical for salaried CEOs.  The typical CEO reporting ordinary income of $1 million or more would be paying taxes at a rate of something like 29%, including payroll taxes.  The typical secretary reporting $50,000 of income would be paying something like 11% for income tax, and something like 14% including payroll taxes. 

41 Comments:

At 9/22/2011 8:39 AM, Blogger Larry G said...

just a question.

can someone be compensated with something other than "wages"?

and if they are - what are the various other kinds of compensation and how are they taxed?

for instance, we know that many people receive health insurance in lieu of wages and it's not taxed.

and we know that many CEO take compensation in ways other than salary and I assume that has advantages...

when you're talking about someone like Buffet - we're not talking wages - right?

 
At 9/22/2011 8:52 AM, Blogger Dr. Tax in Sacramento said...

You are assuming that his calculations are correct. Even with the nominal salary of $100,000 and the rest in long term capital gains his rate is probably not what he says it is. At the same time, the rate for his secretary is also not what he says it is (it is undoubtedly) lower unless her salary is considerably higher than most secretaries.

Buffett was trying to shill for the President. And he is less of a pundit than an investor. Remember that he also made a case against reducing the estate tax - although a good part of his success was using the estate tax to his advantage by buying closely held businesses.

 
At 9/22/2011 9:10 AM, Blogger Alan said...

I wonder if Buffett didn't make the incredibly naive (assuming it was unintentional) mistake of comparing his actual average rate, based mostly on capital gains as you point out, with his secretary's MARGINAL rate.

 
At 9/22/2011 9:13 AM, Blogger Hydra said...

That is more like it. Outlier I can believe. I think I saw somewhere there are around 17,000 outliers like this.

Why should one taxpayer pay more than another ( with more means).

And some have suggested means testing for receiving social security.

Why should one person who paid in receive less than another who paid the same amount in?

If we means test ss, why not income tax?

 
At 9/22/2011 10:31 AM, Blogger Jon said...

He never said this applies to typical CEO's. He's always said "people like me", that is people in the Forbes 400. Our tax system is contrived to provide additional benefit to the super wealthy. Why? Not just the top 1%. The top few thousandths of a percent. Why should they pay a lower rate than the lower income groups?

 
At 9/22/2011 10:35 AM, Blogger Larry G said...

if you don't tax other kinds of compensation with a similar rate to what is on wages - then more and more people will attempt to shift their compensation to less taxed forms ..... right?

 
At 9/22/2011 11:13 AM, Blogger Mark J. Perry said...

Well then many others, including Obama are misrepresenting Buffett:

"President Barack Obama says he wants to make sure millionaires are taxed at higher rates than their secretaries."

 
At 9/22/2011 12:02 PM, Blogger Marko said...

Buffet could just pay himself all in salary, and role his dividends back into this company, couldn't he? That way he would pay a much higher rate and everyone would be happy, no?

I guess the Prez is unhappy that it is even possible that a millionaire can pay a lower rate than a secretary.

All this is silly politics and an attempt to distract the electorate, of course, since the real issue is how do we change federal laws and regulations to stop them from discouraging private sector job growth. Doing something about a handful of "hedge fund managers" and top 400 CEOs will do absolutely nothing to reduce the negative effect of the federal government on job growth. It won't even do anything to help with the other major problem, massive budget shortfalls and debt. Nothing.

Don't be distracted!!

 
At 9/22/2011 12:03 PM, Blogger Sean said...

MP,
"President Barack Obama says he wants to make sure millionaires are taxed at higher rates than their secretaries."

He won't succeed. I kind of like this take on the issue:
http://www.theatlantic.com/business/archive/2011/09/whats-wrong-with-the-buffett-rule/245451/

 
At 9/22/2011 12:08 PM, Blogger morganovich said...

marko-

thank you.

i'm not sure i have ever heard anyone stand up for hedge fund managers before.

for a group that has never taken federal bailout money subsidies, or wrecked the economy, we sure do get vilified a lot.

 
At 9/22/2011 12:08 PM, Blogger Marko said...

Jon - "Our tax system is contrived to provide additional benefit to the super wealthy."

I don't think so - there are many good reasons to tax capital gains at a lower rate. It is Warren Buffet's pay package that is "contrived" to keep his taxes minimal. He is only receiving his pay this way to minimize his taxes. What a hero!

 
At 9/22/2011 12:30 PM, Blogger Methinks said...

Why should they pay a lower rate than the lower income groups?

Why should any group, save the very poor, pay a higher rate than any other group? That's a much better question.

That a tiny minority of people with very high income pay a slightly smaller percentage of their income in taxes than the 99.5-99.99 percentile is a function of the complex tax code that became complex to deal with the disincentives created by the distortions of a progressive income tax system.

They still pay more than Buffet's secretary. But, you can eliminate this problem with a flat tax or a consumption tax instead of an income tax. You won't fix it by raising taxes on everyone in the top 5%.

 
At 9/22/2011 12:51 PM, Blogger Methinks said...

for a group that has never taken federal bailout money subsidies, or wrecked the economy, we sure do get vilified a lot.

I do it all the time. Hey, some of my best friends are hedge fund managers :)

I'm surrounded by them in Greenwich. Funds were blowing up left and right around here in 2008, hardly leaving a scratch on the financial system. By contrast, the most regulated segment of the financial sector collapsed entirely and took the economy with it. Of course that was used as a pretext to tighten the noose of regulation on you guys. I guess to ensure that next time you do your part in destroying the financial system

 
At 9/22/2011 12:57 PM, Blogger Larry G said...

" By contrast, the most regulated segment of the financial sector collapsed entirely and took the economy with it."

not according to this:

http://en.wikipedia.org/wiki/Shadow_banking_system

 
At 9/22/2011 1:17 PM, Blogger Richard_P said...

Going back to capital gains taxation. Why should stock options be taxed as capital gains? I understand that tying compensation to profits is a great incentive, but who is making the investment? The company or recepient of the options?

Capital gains are taxed at a lower rate to encourage investment... which is a good thing. With stock options, I have a more difficult time seeing the recepient of the benefit as making an investment. If these stock options are provided as compensation, why not charge standard income tax rates.

 
At 9/22/2011 1:21 PM, Blogger Larry G said...

when you allow different ways of making money to be taxed at different rates - they will gravitate towards those less taxed ways.

if we taxed the hell out of investments - people would start getting compensated with wages...


I'm not arguing for one direction or the other but our current system encourages strategies to seek the lower tax rates.

is that "working" for the country?

so far.. we seem to prefer spending 1.5T more than we receive in taxes... and instead of actually dealing with the issue - we play silly blame games.

 
At 9/22/2011 1:24 PM, Blogger juandos said...

Good one larry g, using wikipedia is akin to saying you sat at the feet of Elizabeth Warren for lessons in wit and wisdom...

Are jon, marmico, sethstorm, and the pseudo benny joining you for those lessons?

 
At 9/22/2011 1:32 PM, Blogger Larry G said...

Juan -

you never get this part straight guy:

References

^ a b Out of the shadows: How banking’s secret system broke down By Gillian Tett and Paul J Davies,December 16 2007 18:33
^ a b c Geithner-Speech Reducing Systemic Risk in a Dynamic Financial System
^ FT Roubini - The Shadow Banking System is Unraveling
^ "Nicole Gelinas-Can the Fed's Uncrunch Credit?". City-journal.org. Retrieved 2009-02-27.
^ "Bernanke". Retrieved 2009-02-24.
^ Teton Reflections, by Paul McCulley, August/September 2007
^ Beware our shadow banking system, Bill Gross, November 28 2007
^ Comments Before the Money Marketeers Club: Playing Solitaire with a Deck of 51, with Number 52 on Offer, Paul McCulley
^ After the Crisis: Planning a New Financial Structure: Learning from the Bank of Dad Paul McCulley, May 2010
^ Chasing The Shadow Of Money, May 17, 2009, Zero Hedge
^ Lowenstein, Roger (2000). When Genius Failed: The Rise and Fall of Long-Term Capital Management. Random House. ISBN 0-375-50317-X.
^ Bloomberg-Banks $1 trillion purge
^ BIS.org
^ Blackburn - Subprime Crisis

or this:

Out of the shadows
Jul 13th 2010, 12:23 by S.C. | LONDON

ONE of the failures leading up to the crisis was the inability of regulators to understand the scale of the shadow banking system or its interconnectedness with the overall financial system.

http://www.economist.com/blogs/freeexchange/2010/07/financial_regulation

or dozens, hundreds of other credible analyses...

wiki does not create info - it records it from references guy...

 
At 9/22/2011 3:08 PM, Blogger juandos said...

"wiki does not create info - it records it from references guy"...

Wrong again there young man!

Remember the clowns at wiki listed all sorts of supposed 'good' references for their fraudulent anthropomorphic global climate change crapola...

 
At 9/22/2011 3:25 PM, Blogger Paul said...

Larry,

"so far.. we seem to prefer spending 1.5T more than we receive in taxes... and instead of actually dealing with the issue - we play silly blame games."

Yeah, like when you blame Bush for everything. Silly blame games!

 
At 9/22/2011 3:33 PM, Blogger Larry G said...

" Yeah, like when you blame Bush for everything. Silly blame games! "

I'm willing to not blame Bush if you are willing to not blame also.

my point is that we have a significant debt and a horrendous structural deficit - and no one wants to pay for it...

It's not only Bush.. it's the rich verses the middle class verses those that don't pay verses those who get entitlements.

My view is that everyone needs to take a haircut... period...

take responsibility for the problem and move on.

partisan blame is getting us nowhere...

there is no way to pay for this debt without everyone having to pay more.

we can't do it now.. we have to give the economy a chance to recover but at some point - we have to pay the piper...

DOD will have to be cut.

Medicare will have to be cut.

people who don't pay taxes will have to pay their share.

the rich will have to pay their share.

the folks on MedicAid will have to take cuts...

we've spent our way into a box canyon and the only way out is barefoot through the prickly pear....

 
At 9/22/2011 3:36 PM, Blogger Larry G said...

" Remember the clowns at wiki listed all sorts of supposed 'good' references for their fraudulent anthropomorphic global climate change crapola... "

unlike many sources of info - Wiki discloses when there is conflicts in the info.

I know of no other organization that does that.

and they represent both views....

I know of no other organization that does that ...and especially the folks over at Heritage ...

Wiki is not perfect.. has flaws ...but is way ahead of the alternatives unless of course you just want to believe what you want to believe.. and nothing else.

 
At 9/22/2011 4:22 PM, Blogger Hydra said...

I don't think so - there are many good reasons to tax capital gains at a lower rate.

============================

One can argue that it is a transaction like any other and could be covered under a transaction tax or a consumption tax. The only differece is the length of time between buyin gthe property, and selling it at a profit (or loss).

There are plenty of other arguments though, like we cut capital gains a break to spur activity, otherwise people ar more prone to sit on their increases, unless a new opportunity is good enough to make an equal or better gain AND pay the taxes from the previous sale.

As for not binding, why would buffet voluntarily do something and let the free riders float?

The underlying question here boils down to what is fair, and we have no procedure for determining that. But, if you had such a black box procedure, it would apply equally to this problem and many others.

That is why we have never tried to invent such a procedure: it might give one side the desired result in this case, and work against the same coalition in another situation.

We do not want fair, what we want is partisan advantage, therefore we can conclude that the proposals from either side are designed not for fariness but for partisan advantage, and we can be pretty sure proposals from both sides are unfair.

The answer has to be someplace else, but we will never find it because we are conditioned to fight the issues, rather than finda a best solution.

 
At 9/22/2011 4:27 PM, Blogger juandos said...

"unlike many sources of info - Wiki discloses when there is conflicts in the info"...

No wiki just lists what may or may not be actual references they used...

Look up the term, "peer review" and you'll realize wiki fails miserably....

 
At 9/22/2011 4:44 PM, Blogger Hydra said...

I wondered when Elizabeth Warren would show up.

What do you say to her argument that no one gets rich by thmselves?


It does seem one could argue that the richer one is, the more help they got along the way, and fairness dictates that they pay for what they get.

We just do not have measurement systems in place for that, or sa i argued above, no procedure in place.


Without getting politics or any specific situation in mind, could we agree that a first principle is that people should pay for what they get (Given that they have a way to do so. Obviously a welfare recipient is in no position to pay for the welfare he gets, at this time.)

If you had that pricnciple, and you could measure what people get, then would her argument have any merit?

Who gets what from the government? How would you go about measuring such a thing in a way that people could generally agree with the result?

 
At 9/22/2011 4:44 PM, Blogger Larry G said...

" No wiki just lists what may or may not be actual references they used...

Look up the term, "peer review" and you'll realize wiki fails miserably.... "

compared to who - the Heritage folks?

ha ha ha

wiki allows people to add references, to dispute references and to provide arguments for and against the information - ant the "dispute" banner stays there until there is agreement on the info.

I see no other comparative .... that allows open ended commenting and participation... and I'll take something on wiki any day over something on Heritage or the other right wing sites....

at least with WIKI - you can go to the references and make your own decision as to credibility and from those references do keyword searches to turn up other references..

most of the folks who don't care for Wiki seem to prefer biased sources instead - you'll find those folks NOT PROVIDING balanced references but instead biased references.

I'll take wiki over your way ... any day...

 
At 9/22/2011 4:46 PM, Blogger Hydra said...

OK, so WIKI produces a kind of homogenized, generally accepted or comon knowledge, which you as a radical outlier disagree with and dismiss out of hand.

We get that.

 
At 9/22/2011 4:55 PM, Blogger Hydra said...

Not all biased references are wrong.

It is only that since they are promoting a viewpoint rather than searching for truth, that they are more LIKELY to be wrong.

Concensus isnt the same as truth. The truth is that rail shipments are up, the concensus is what is taking the market down, which creates its own subjective truth.

A biased market participant may lobby or advocate the purchase of gold, and miss both the objective truth (rail shipments are up) and the subjective truth (you had better cover your ass in the market).

 
At 9/22/2011 4:59 PM, Blogger Hydra said...

Heritage and many others seek facts that support their position, rather than a position that is supported by Fact.

So far as I know, WIKI does not have a predefined position to argue. I have not heard them being accused of being liberal mainstream media or of being Faux News.

 
At 9/22/2011 5:03 PM, Blogger Larry G said...

what wiki provides is references, transparency and disclosure.

it's up to you to follow them and develop others from the keywords in those references.

it's a starting point not final answer.

Wiki can be searched by Ctrl F to find key phrases... or to find out what's NOT there...

from the key words you find in wiki you can launch google searches of phrases in quotes to narrow and focus the search .

I prefer WIKI to sites like Heritage and other right wing (or left wing) blogs that often cite cherry-picked info out of context and do not give the exact name of the referenced report nor the page numbers and do not intend to.

the info they provide is often paraphrased so you end up with no realistic way to verify or insure it's accuracy.. it's just stuff biased blather splattered on their site...

mostly offal.. obviously agenda-driven and no intention of being transparent or honest in their handling of information.

Contrast that if you will with Wiki which is pretty generic.. pretty transparent.. and almost never biased and if thought to be so - a dispute is filed and noted.

no such deal with the Heritage folks...or those who function like them which is a shame because Heritage could contribute but they choose to propagandize instead most of the time.

you can figure out pretty quick the motives of those who reject wiki out of hand though.

 
At 9/23/2011 2:29 AM, Blogger Ron H. said...

"Without getting politics or any specific situation in mind, could we agree that a first principle is that people should pay for what they get (Given that they have a way to do so."

Everyone should pay for what they ask for and get.

"If you had that pricnciple, and you could measure what people get, then would her argument have any merit?"

No.

"Who gets what from the government? How would you go about measuring such a thing in a way that people could generally agree with the result?"

As all value is subjective, you cannot measure what other people get.

 
At 9/23/2011 2:46 AM, Blogger Ron H. said...

"Buffet could just pay himself all in salary, and role his dividends back into this company, couldn't he? That way he would pay a much higher rate and everyone would be happy, no?"

Dividends earned are taxed, no matter what you do with them. Reinvesting them doesn't excuse them from taxation.

Buffet could pay himself more salary, thus reducing the amount of the dividends paid, but all other stockholders would be paid less also. They might not like that.

I think whoever suggested Buffet hopes to sell more life insurance by taxing the wealthy more, has nailed it.

 
At 9/23/2011 2:48 AM, Blogger Ron H. said...

Sorry about the interruption. We return you now to the Larry & Hydra Comedy Show.

 
At 9/23/2011 9:54 AM, Blogger John Hudock said...

It is becoming a pet peeve of mine that this 17% tax rate that Buffett quotes is taken as gospel. Warren Buffet does not pay a lower tax rate than his secretary. For many reasons, but the main one is that most of Buffett's income comes in the form of either dividends, which are taxed at 15% which may well be slightly lower than his secretary's effective rate, but that is because he owns a business which has already paid upwards of 35% corporate tax on those earnings before paying out dividends to Mr. Buffett. His other main for of income will be capital gains from the sale of shares in his companies. Since Mr. Buffett is known to be a very long term holder, a good part of the capital gains 'savings' is actually money paid on increases in his stocks value due to inflation (and also double taxation, since his companies have already paid corporate taxes on the retained earnings that form the basis of the capital appreciation). An honest accounting of Mr. Buffetts tax rate would have it well above that of his secretary. If Mr. Buffett isn't aware of this, he's an idiot. Rather, I'm sure he is aware of it which just makes him a partisan demagogue. (And an accounting of the profits he has earned from government bailouts and various corporate welfare would give you a good idea why he supports bigger government.

 
At 9/23/2011 10:37 AM, Blogger juandos said...

"What do you say to her argument that no one gets rich by thmselves"...

Well hydra, its really pretty simple, Warren is stumbling all over herself to make a pointless point...

Instead of reinventing the wheel for you hydra why don't you let Cliffton B explain some of it to you instead...

 
At 9/23/2011 10:48 AM, Blogger juandos said...

"unlike many sources of info - Wiki discloses when there is conflicts in the info"...

The Wiki crew has a tendency to make it up as they go along...

Hey larry g, can I sell you a bridge? I've many reference sources you could look at...

"wiki allows people to add references, to dispute references and to provide arguments for and against the information - ant the "dispute" banner stays the..."...

Wrong again larry g!

I've watched at Wiki editors strike perfectly valid information from wiki regarding acid rain, Iraqi WMDs, and the Ponzi scheme called Social Security...

At least at Heritage or Cato one can question the information and actually get back answers from the authors of articles and studies posted at both their sites...

Wiki just wastes my time...

 
At 9/23/2011 11:50 AM, Blogger Ron H. said...

juandos: "I've watched at Wiki editors strike perfectly valid information from wiki regarding acid rain, Iraqi WMDs, and the Ponzi scheme called Social Security..."

And especially that mother of all frauds, global warming.

 
At 9/23/2011 12:01 PM, Blogger Larry G said...

funny... the current wiki page

http://en.wikipedia.org/wiki/Global_warming

seems to have been updated and now has info that is not disputed....

that's one of Wiki's strong points and it's also how politics works.

you find what you can AGREE on and then work on what you don't - and it's a continuum... and requires a living document...

the Wiki Process has warts - but it's way, way better than folks like Heritage/Cato who only know one truth.. and self-feed what they want to believe and summarily reject anything that is antithetical to their dogma.

that's while they end up being recognized as "deniers".

and ... how many of your GOP candidates side with Heritage/Cato on GW ?

the real world is a rough place for deniers.. you can't even become President...

;-)

 
At 9/23/2011 6:44 PM, Blogger Ron H. said...

"seems to have been updated and now has info that is not disputed...."

Not disputed by whom, Larry? You must have forgotten to read my reference. Disputes are not allowed on this subject. Do you really believe science is done by political bodies and determined by consensus? You are pathetic, you silly clown.

Get a clue.

 
At 9/23/2011 7:17 PM, Blogger Larry G said...

re: clown

well.. I STILL see the dispute banners...

AND.. NOW I see at the bottom

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now how many times have you seen that at the Heritage/Cato loon sites - dufus?

 
At 9/24/2011 2:05 AM, Blogger Ron H. said...

"well.. I STILL see the dispute banners...

AND.. NOW I see at the bottom

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now how many times have you seen that at the Heritage/Cato loon sites - dufus?
"

Did you check the ratings for this page, Larry? Two out of a possible five for "trustworthy"?
Not much of a recommendation, eh?

In any case, you are evading. read my reference to understand the problem.

The references, external links, and further reading are 100% alarmist cites. Notes for this page, are 90% alarmist, and 75% are to IPCC., a proven fraudulent source. The names I recognize are a Who's Who of alarmists and warmists. Where are the skeptical references, Larry?

The picture "Greenhouse effect schematic showing energy flows between space, the atmosphere, and earth's surface", "Greenhouse_Effect.svg is obviously wrong, and has been shown to be wrong, yet there it still is. can you tell what's wrong with it?

Wiki is not an unbiased source by any stretch of the imagination. You need to do better.

 

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