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The “Warren Buffett Pays a Lower Tax Rate Than His Secretary” Lie
You hear it again and again on the Left and in the Media:
“Warren Buffett pays a lower tax rate than his secretary does.” You hear it so often — and it’s never challenged — that it must be true. This is usually the prelude to the “Trump only cut taxes for his rich friends” and “the rich have to pay their fair share” argument.
But is it true? Of course not. The US income tax system is still a progressive tax system where those with the most income pay not only the most taxes but also the highest tax rates.
I went to the IRS website (You can Google IRS TAX STATS) and found the breakdowns for income taxes paid for several years. Let’s look at 2020, Trump’s last full year in office…
The richest Americans — those with incomes over 2 million dollars in 2020 — paid an effective tax rate of 26.68%.
The middle class — those with incomes between 75,000 and 200,000 dollars — paid an effective tax rate of 10.12%.
The poorest — those with incomes less than 25,000 dollars — paid an effective rate of 1.04%.
How does this compare to, say, Obama’s last year? Let’s look at 2016…
It certainly looks like everyone’s taxes were higher in 2016 than in 2020.
The poorest Americans paid an effective tax rate of 1.7%. Between 2016 & 2020, their effective tax rate went down by almost half, from 1.7% to 1%.
The middle class paid an effective rate of 11.69% in 2016. Their taxes also went down, but not nearly by almost half. They went from an effective tax rate of 11.69% in 2016 to 10.01% in 2020.
And the richest? They got a break too. But a tiny one. Their effective tax rate went from a rate of 27.0% to 26.67%.
My only question, then, is just how much does Buffett’s secretary make?
I suppose it’s theoretically possible that if Buffett’s secretary makes more than $2MM per year and Buffett takes his income as long-term capital gains, the latter could pay a lower tax rate than his secretary. The long-term cap gains rate is 20%. So if his secretary is VERY well paid and his income is mostly long-term cap gains, it could be true. But it’s VERY unlikely. There is a small cadre of hedge fund people who move heaven and earth to finagle their incomes to be all long-term capital gains. They skate on the edge of illegality. And I’ve never heard Warren Buffett’s name arise as part of that discussion.
So, no. Warren Buffett does not pay a lower income tax rate than his secretary.
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Thanks, Ekosj. Very good article.
As a side note, I do wish that Ricocheteers would stop uncritically forwarding the statists’ propaganda line, that the President of the US can “cut taxes” on anyone.
It is a lie that is poisonous to our freedoms, because it accepts the establishment of the progressivist goal of an authoritarian dictatorship as a done deal.
I’m not disputing your very welcome analysis, but I wonder what share of the income of the very rich comes from tax-favored municipal bonds, i.e. the money that is used to help make state and local government bigger and more oppressive. Betcha that the left doesn’t want to make taxes more progressive by eliminating that tax advantage.
Do they even bother with the word ‘rate’ in their lie?
Buffet shelters a good deal of his monies in a charitable foundation.
Buffet also mentored Bill Gates in terms of how to go about doing this by helping him understand what he’d learned about doing this.
Also when you are super rich, not just middling income rich with a coupla million dollars, you then create shell companies in other countries.
So your graphs make sense for those rich people who don’t play these games.And yes, Trump helped out everyone with his adjustments to the tax code. Our very small business was helped and both of us noticed this when we filed for 2017 in 2018.
But the seriously rich do have this end of things figured out. That is why Buffet stated his secretary paid more in taxes than he did – she couldn’t afford to put her secretarial earnings into a self-created charity foundation that kept a portion of her earnings safe from the tax man.
If Warren Buffet pays a lower effective income tax rate than his secretary does, it’s because he’s structured his financial world to produce that result. All or almost all of his “income” comes in some tax-advantaged form (deferred recognition, capital gains, offset by something entitled to a tax credit, income of a type exempted from taxation such as certain bonds, is rerouted through the companies he owns so it doesn’t show up as personal income to him, etc.).
His secretary does not have the advantage of being able to structure her finances to produce such an effect. Most or all of the secretary’s income is probably ordinary income (salary and/or bonus), taxable at ordinary income tax rates.
As a person dedicated to investing, Mr. Buffet has almost limitless control over structuring his finances to have income show up at times and in forms that work to his advantage. He no doubt pays accountants to do just that. And lower taxes very well may be one of the goals of his financial structure.
He doesn’t have to pay a lower income tax rate. He could structure his financial world so more (or even all) of his income is ordinary taxable income. He could skip some deductions or credits when filling out his income tax forms. He could voluntarily pay more to the IRS.
If Warren Buffet pays a lower effective income tax rate than his secretary does, it’s because he’s organized his finances to produce that result based on the tax laws currently in effect.
If he’s given his money to a charitable foundation then it’s not really his … even if it’s his charitable foundation. No?
Thanks for posting this IRS data Ekosj.
Good question. The WSJ editorial page has over the years run articles that explain the racket by which the super-rich set up charitable foundations, but those articles are mostly about the way the foundations then subvert the donor’s wishes after he’s dead and gone. Bill Gates’ personal wishes seem to be more in line with the kind of people who run charitable foundations, so maybe that’s not a big risk for him.
But if a charitable foundation can be set up that provides “jobs” for the founder’s descendants into the future, maybe there are ways by which a founder can use his foundation’s assets to exert influence in the world even though the resources are not owned by him in any sense that the IRS would consider ownership. Maybe. I wouldn’t rule it out, but I don’t know any details of how it would be done, either. It’s an interesting question.
Kinda figures though, doesn’t it? Why would they give so much money away if they didn’t still have control over it? Might as well just pay a fraction of it in taxes, and keep the rest.
What’s the old saying? I think it goes …”Figures never lie, but liars figure.” Excellent presentation of numbers and charts in an easily understandable format. Well done, as usual, Ekosj.
One thing I have always felt is the stupidity of wanting wealthy people to be deposed of their assets out of jealousy. Making wealthy people poor is not going to make me rich.
Wouldn’t it be grand if, after Bill and Hillary and the rest of their mobocracy are gone, the Clinton Foundation becomes a bulwark in the preservation and advancement of America as a Constitutional republic?
Obedience to the Greatest Commandment is one possible reason.
Never automatically attribute your own religious beliefs to others!
Yes! I never thought of that, thanks.
It would, but that would violate Conquest’s 2nd law. Here they are, as recounted by John Derbyshire.
But if every time the Presidential candidate lays out his policies, he then follows with “if only Congress lets me”, nobody will believe he means it. He will be said to already creating an excuse for doing nothing.
However, and of of course, you are correct.
Are you referring to those oppressive “Munis” that allow cities to build and improve their sewer and water systems?
Although I must point out that very few people on this planet have made as many other people millionaires as Warren Buffet, when he complains that he is not paying enough taxes I have to scratch my head and call BULL.
Justice would be served!
I always assumed he still had some control or influence over the money, and that putting it in a foundation gave him some tax advantages. The possibility never occurred to me that he would give up control altogether. However, just what level of control and what kind of control is still an interesting question. Does he have any influence on the hiring of personnel at the foundation?
There are laws for philanthropic foundations that seem to have been intended to to break up some of the too-cozy relationships or to keep them from forming, and those laws have changed over time. For example, in the 1980s there was a change that required the Kellogg Foundation to divest itself of much of the stock of the W.K. Kellogg Company that had been the original funding that established the foundation, which legislation I presume was intended to forestall some such problems, though I never heard anyone say the new regulation was targeted at that particular foundation. (Disclosure. My work life was at that time affected by occasional funding we got from that foundation, though this divestiture didn’t have any immediate or direct influence on my workplace that I’m aware of. At least I never thought of it that way, and I do try to pay a little attention to such things.)
Think of questions along those lines.
Yes, I’m referring to those.
The Constitution gives the power to tax to Congress, not to the President. The Executive only has the responsibility and authority to collect the taxes previously voted on and approved by Congress; the President can veto a tax law passed by Congress, but even then, Congress has the final decision.
We should not care whether or not a candidate “means it”, if he claims he has the authority to decide what taxes the Federal Government will impose.
In either case, he is unfit for the office: either because he is ignorant of the oath of office, or intends to disregard it.
This is a case in which it is most excellent that you are being pedantic. Thank you. We need the reminder.
This is the thrust of the left’s argument, that the post does not refute.
And hopefully the final words of the Clintons would be “oh the pain, the pain!”
So you don’t actually know, as admitted in the paragraph above.
How can you accuse other people of a “lie,” in the post title, when you don’t actually know?
I think that for single people, the marginal federal tax rate is 22% for income in the range of $44,000 to $95,000. The standard deduction is around $15,000. So someone making in the $60,000 to $100,000 range is facing a federal marginal tax rate of 22%, probably.
Plus there’s FICA. That’s another 7.65%. That’s a total marginal tax rate of 29.65%.
The long-term capital gains rate is 20%. There is no FICA tax on capital gains. So a rich person who invests so as to have little or no regular income, but to enjoy long-term capital gains, will face a marginal tax rate about 1/3 lower than a secretary earning around $60,000-$100,000.
This is a problem with our tax code. Labor is taxed at a significantly higher rate than capital.
In what world does that make sense? One guy works hard to earn $100,000, another guy is a trust-fund baby who gets $100,000 in long-term capital gains, and we impose a significantly higher tax on the former?
Hmmm.
The thing that I probably know best is the civil law of the state of Arizona. I’m a month away from my 26th anniversary as an Arizona lawyer, so the law of my state is my thing.
I am not much of a “conservative” on the law.
I was when I was younger. I have learned, over a quarter-century, that my conservative views of the law were simplistic and unrealistic. I guess that in fairness, I should point out that this is my opinion. Only the Lord is properly qualified to judge.
I have also become generally less conservative as I’ve grown older, though not on every issue. So the idea that increasing knowledge results in more “conservative” beliefs does not seem to be true, in my case.
One of the things that I’ve learned is that simplistic explanations for complex phenomena, like Conquest’s so-called “law,” are rarely correct. They generally serve as propaganda.
You are right, the tax on income is too high.
Capital is investment in others. Income is investment in yourself. Capital redeemed at a higher value than the amount you put in means your investment in others grew many many more.
As a society we value investing in others. So we encourage it.
By taxing it less.
The government of a republic must never use taxes to encourage or punish the citizens for making purely personal choices. That is not republicanism, it is despotism, just one step above chattel slavery.
The only purpose for taxing the people that is allowable in the republic is raising the income needed by government to fulfill its rightful purposes.
All taxes should be ad-hoc on a needs basis?