Why America’s Richest Man Thinks He Should Pay More Taxes.
Part I of a multipart series
Warren Buffett, thinks the U.S. tax system is unfair. The $62 billion dollar man thinks he should pay more taxes, as a share of his income, than he does now. Buffett, know for his simple tastes (hamburgers and Cherry Coke) and frugal lifestyle, sticks out among his fellow billionaires; perhaps most famously for arguing that the tax system in the United States isn’t as progressive as one might think.
In an experiment of one, Buffet polled his coworkers to find out how their effective tax rate compared to his rate of 17.7%. The results of Warren’s poll: Buffett’s $60,000 a year secretary paid 30% of her income to the federal government and the average effective tax rate for the office mates who took the poll was 32.9%. Not one of the fifteen employees who took Warren’s poll paid a lower percentage of their income in taxes than Buffett’s 17.7% effective tax rate.
NBC’s Tom Brokaw interviewed Buffet about his informal office poll:
Of course, Warren is paying much more in absolute terms; he paid roughly $8 million in federal taxes last year. In a system that is supposed to be progressive, how can it be that the world’s richest man pays a lower tax rate than his receptionist? Is it just a fluke limited to Mr. Buffett and his coworkers, or is this a broader trend?
Read on, calculate your effective tax rate and take our poll.
What exactly is a progressive tax anyway?
A progressive tax is one that levies a higher tax rate as income increases. The U.S. Federal Income Tax is considered an example of a progressive taxation system.
Below are the 2008 Tax brackets for single filers and married couples filing jointly:
As income increases, the marginal tax rate paid also increases. Note that these are marginal tax rates. A single individual making $165,000 pays the same 10% on the first $8,025 income as everyone else and only pays the 33% tax rate on the $450 of income earned over $164,550. Moneychimp has a useful tax calculator that allows you to calculate an estimated effective tax under various scenarios.
Here is an example from Moneychimp:
Try the calculator for yourself. Remember to enter an estimate of your taxable income, which is your gross income adjusted for deductions like mortgage interest paid and contributions to retirement accounts like an IRA or 401k. You can look at your most recent tax return to find your taxable income. If you use a tax preparation software like TurboTax, it automatically calculates your effective tax for you in a summary page.
[Edit] One omission in my original post… you will need to add in your payroll, or FICA taxes, in order to compare your effective tax rate with Buffett’s. Again, Moneychimp has a useful discussion and calculator to help you calculate your payroll taxes paid. When calculating payroll taxes, you should use your gross, or pre-tax income and you should divide the total in half unless you are self-employed since your employer pays half of the payroll tax.
Once you have calculated the dollar amount of your income tax paid as well as your payroll taxes paid, add the two together and divide by your gross income to come up with your effective tax rate. This is a ball-park figure. If you have significant capital gains or dividend income, those are taxed at 15% and will move the result you would get for your effective rate up or down. That said, most people, as can be inferred from my post on McCain’s proposed capital gains tax cut, don’t receive a significant portion of their income from dividends or capitals gains.
Now that you know – or at least have a ballpark estimate of – your effective tax rate, are you paying a higher effective tax rate than Warren Buffett? Take the poll:
In Part II of this series I will attempt to answer the question: “Just how progressive is the tax system in the United States?” I’ll also be taking a look at the history of tax changes in the US and exploring the rationale behind progressive taxation.
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