In response to claims by David Clayton on the Vox Rationalis blog that I'm "thoughtless, dishonest and/or lazy" in my analysis of Warren Buffett's tax claims, I provide the chart above displaying the average federal tax rates that various income groups paid for: a) individual federal income taxes and b) payroll taxes in 2007 (most recent year available from the Congressional Budget Office, retrieved from the Tax Policy Center). These data allow for the most accurate "apples-to-apples" analysis of Buffett's claim that his federal tax rate was 17.4% for income taxes and payroll taxes (see today's WSJ and Buffett's letter to Rep. Huelskamp), compared to the average federal tax rate of 36% for his employees.
It should also be noted that Buffett's original claims in the NY Times were as follows:
"Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s 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 and averaged 36 percent."
Here are my thoughts:
1. Warren Buffett's tax situation is not typical for "wealthy" taxpayers, because the average tax rate for those in the top quintile is more than 20% compared to Buffett's 17.4% rate. As discussed previously, Buffett's lower-than-average tax rate is because he receives most of his taxable income as dividends (which have been taxed previously at the corporate level) and capital gains - taxed at only 15% - and not as ordinary income, which would be taxed as high as 35%. He also may receive income from tax-exempt municipal bonds.
2. More importantly, it seems highly unlikely that Buffett's secretary and other co-workers are paying effective federal tax rates of 33-41%. It's important to note that Buffett has only mentioned federal income taxes and payroll taxes, and not state income taxes, and has specifically reported his 17.4% rate on only federal taxes. Given the tax data in the chart above, it's either the case that: a) Buffett's assessment of his co-workers' tax data is inaccurate, or b) all of his office workers faced extremely unusual tax situations last year, which are not at all representative of the taxes paid by typical Americans.
3. Our federal tax system is highly progressive on average - higher income groups pay higher rates of federal taxes even when including payroll taxes - in general and on average. Buffett's suggestion and anecdotal "evidence" that the federal tax system is regressive in at least some cases (his secretary and lower-paid employees pay a higher federal tax rate than he does) is not typical, but can only be considered as special cases of extreme outliers, both for him and his employees.
Now that Buffett has released some of his tax information, perhaps he should have his employees release their tax information, so that we could see how it's possible that they are paying an average rate of 36%. If he claims that he's adding state taxes to his "analysis" for his employees, then that should be clarified, and he should explain why he didn't include state taxes in the tax information he released.