Taxes: Buffet “Rule” or Buffet “Ruse”?

As expected in politics, rhetoric often flies faster than facts. The “outrage” over billionaire Warren Buffet saying he pays less tax (15%) than his secretary (30%) is a good example. Buffet knows better.

As with most falsehoods, there is enough element of truth to make it believable. But Buffet conveniently forgets to mention that taxes are actually paid twice on investment income. That is one reason capital gains tax rates are lower than taxes on wages, which are only taxed once.

For example, assume a corporation has $1,000 of profit before taxes. It will pay 35% tax on that, leaving $650 that it pays to shareholders as non-deductible, after-tax dividends. The shareholder, like Buffet or Romney, then pays 15% tax on the $650 = $97.50. After both taxes, there is only $552.50 left over. So the effective tax rate on that $1,000 was  44.75%! (That is why most doctors use S corporations to avoid this dreaded “double taxation”.)

Back to the secretary. If she actually paid 30% in income taxes, the tax tables show that she would have to have earned between $500,000-$1M. That it doubtful. So folks probably get the 30% figure by adding payroll taxes on top of her income taxes.

The Congressional Budget Office says that, counting all income taxes, the top 1% pays an effective income tax rate of 29.5% while the average middle class taxpayer pays 15.1%. (Of course it is a different discussion to note that the top 1% pays in about 38% of all tax dollars….)

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About Kate Willeford, Dental CPA & Advisor

Dental CPA & Advisor serving accounting, tax, management, transition and financial planning needs of dentists since 1975.
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One Response to Taxes: Buffet “Rule” or Buffet “Ruse”?

  1. Er beschäftigt sich mit dem ganzheitlichen Lernen und speziell mit dem
    Fremdsprachenlernen und wie man dies in den Alltag einbauen kann, damit man es auch über einen längeren Zeitraum durchhält.

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