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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.
Discussion (41)
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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.
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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.
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Do they even bother with the word 'rate' in their lie?
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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.
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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.
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