Warren Buffett paid $6,938,744 in federal income tax for 2010. He then tells us that his is 17.4% of his taxable income. The 17.4% is known as an Effective Tax Rate. Taxable income is technically referred to as Adjusted Gross Income (AGI) rather than gross income. He then tells you that this was lower than any of the twenty people in his office who paid 23 and 41% but averaged 36%. He does not tell us how he calculated those rates. His op-ed.
The bulk of Mr. Buffett’s income comes from investments in either sales of assets or dividends. While assets held less than a year receive ordinary tax treatment assets held longer are taxed at 15% and the rules just get murkier from there. However, on this point, that investment income is often taxed at lower rates, we completely agree with Mr. Buffett. Whether this is reasonable is subject to debate but we are discussing what is not what should or should not be.
The income for the vast majority of Americans comes from wages. Wages are taxes at ordinary rates (2010 tax brackets). Only 53% of Americans pay federal income taxes. Of the 53% who do pay federal income taxes 87% of those earning less than $100,000 have an effective tax rate of less than 10%.
This leads us to ask some interesting questions. Is Mr. Buffett wrong when he tells you his employees pay at egregiously higher rates then he does, does he pay them far and above $100,000 a year in wages or is he comparing apples to oranges?
Let me suggest to you that Mr. Buffett is offering his rate based on AGI and his employees’ rates based on their gross income. Effective tax rates don’t come out in whole round numbers. They have lots of little decimal points at the end. See for example; Mr. Buffett’s effective tax rate of %17.4. Does an honest dealer try to persuade you by offering as same things not same?
…tomorrow more on taxes and how Buffett continues include other forms of taxation and mischaracterize them in order to further mislead his readers so he may generate their antipathy for the super-rich; whomever they may be.
