“Asking a billionaire to pay at least as much [tax] as his secretary is plain common sense,” says President Obama. When Warren Buffett announced that his secretary paid a higher rate than he did, some people calculated that he must pay her at least $200,000 a year to put her in an (average) 19 percent tax bracket.
Yet the latest report is that Warren Buffett’s secretary pays 35.8 percent of her income in federal income taxes, and other people in his office pay as high as 41 percent. Buffett himself supposedly pays only 11 percent. As dramatic as this sounds, the problem with this story is that the marginal federal tax rate is 35 percent. In 2010, people only paid that rate on incomes over $373,650; the rate on all income up to that amount is lower. If a married person’s income is $400,000, for example, and they they take only the standard deductions, their tax rate is less than 27 percent.
In other words, you can’t have a tax rate of 35.8 percent, much less 41 percent. If Warren Buffett’s secretary is paying that much, she needs a new accountant.
Or, more likely, Buffett is including social security and medicare deductions in the tax rate. This is a unfair, because the standard social security rate only applies to the first $106,000 of income, after which the rate drops by 80 percent. Yet no one is currently suggesting that social security rates be increased for high-income people.
But even social security isn’t sufficient to explain a 35.8 percent tax rate. At $106,000 of income, the average tax rate is about 22 percent (lower after deductions are considered), and social security & medicare only add about 7.6 percent. At higher incomes, social security & medicare only add about 1.5 percent, so Warren Buffet’s secretary’s income would have to be well over $1 million to pay 35.8 percent in federal income, social security, and medicare taxes. So perhaps Buffett and his secretary were also including state or local taxes in their calculations.
The real focus, of course, is on the capital gains tax, which is currently set at 15 percent, but is set to increase to 25 percent next year. Of course, some want to eliminate the capital gains tax entirely, so those who want the rate to increase are making this an issue now.
This is litmus test on how people view government. If you think government works, then letting the government take more money from people seems like a good idea. If you think government doesn’t work, then raising tax rates on anyone, billionaire or secretary, only feeds the beast.
The Antiplanner is no fan of Newt Gingrich, but his response to Obama’s challenge is sensible: don’t raise the tax rate on billionaires, lower it on secretaries. As half-billionaire Steve Forbes proposed a few elections ago, simplify the tax code by imposing a flat tax on everyone.
As Reason magazine pointed out last year, the debate over marginal tax rates is pointless. Since 1950, marginal tax rates have varied tremendously, but the federal government consistently collects only about 18 or 19 percent of GDP. Raising rates won’t increase the government’s share of GDP because people respond to higher rates by changing their behavior to reduce their taxes.
One lesson from this is that, if we want to reduce the federal debt, federal spending must fall below 18 or 19 percent of GDP so the federal government can run budget surpluses that can be used to pay off the debt. A more subtle lesson is that increasing federal revenues requires an increased GDP, which also suggests lower tax rates so that people will invest or spend money on things that boost GDP.
We’re supposed to be upset that Warren Buffett and Mitt Romney pay such low tax rates. The Antiplanner strongly suspects, however, that Buffett and Romney are doing more to boost GDP than the federal government would do if it had more of their money. Raising taxes will do our economy more harm than good.