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Sorting out the truth in politics

PolitiFact: Obama's call for taxing the rich is not that simple

Not all millionaires are equal.

There are millionaires who earn their income like most of us — in salaries. And then there are millionaires like Warren Buffett who earn their living as hedge fund managers or through investments and enjoy a lower tax rate.

President Barack Obama blurred the distinction in his recent speech on the economy, calling out things that he said "shouldn't happen."

"Warren Buffett's secretary shouldn't pay a higher tax rate than Warren Buffett. There is no justification for it. It is wrong that in the United States of America, a teacher or a nurse or a construction worker who earns $50,000 should pay higher tax rates than somebody pulling in $50 million."

Obama called for a new "Buffett rule" that would stop such instances, but offered no specifics on how such a rule might work.

His speech prompted a torrent of e-mails from PolitiFact readers asking whether it is true that secretaries pay more in taxes than millionaires.

We understand their confusion. But Obama didn't say that secretaries pay higher taxes than millionaires, although he left that impression. He said that they shouldn't and he focused on tax rates, rather than taxes. Those are important distinctions for reasons we'll explain.

Buffett vs. secretary

We recently fact-checked Buffett's statements about taxes from an op-ed in the New York Times. Buffett said that his taxes amounted to "only 17.4 percent of my taxable income — and that's actually a lower percentage than was paid by any of the other 20 people in our office." Individual tax filings are private, so there was no way we could compare Buffett's actual tax return with that of his secretary and other colleagues. So we checked Buffett's statement that the "mega-rich" pay about 15 percent in taxes, while the middle class "fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot." We rated the statement True.

Here's how it's possible that Buffett paid a lower tax rate than his employees. Basically, most of Buffett's income comes from capital gains and dividends, income from investments he makes with the money he already has. Income earned by buying and selling stocks or from stock dividends is generally taxed at 15 percent, the rate for long-term capital gains and qualified dividends.

We don't know what Buffett's secretary, who was mentioned by Obama but not by Buffett, earns or pays in taxes. But if the secretary made more than $83,600, marginal tax rates of 28 percent would apply. Then, there would be payroll taxes of 6.25 percent on the first $106,800, money that goes to Social Security, and an additional 1.45 percent on all income, which goes to Medicare. The secretary's overall tax rate would be lower than 28 percent, since not all the income would be taxed at that rate, only the income above $83,600.

It gets a little complicated, given how the tax brackets work; but basically, people who make between $100,000 and $200,000 are paying about 20 percent in federal taxes, including payroll and income taxes, according to an analysis from the nonpartisan Tax Policy Center.

So in this case, his employees' tax rates might be higher because so much of Buffett's income comes from investments and is taxed at the lower capital gains rate.

Secretaries' taxes

Now, does a secretary usually pay higher tax rates than a millionaire? The answer to that question is definitely not.

Most secretaries don't make that much. put the average salary for an entry-level secretary at $33,249. The top marginal rate for the secretary would be 15 percent, and then typical deductions and exemptions would reduce the tax burden even more. If the secretary had children and no other income, the likely income tax burden would be zero.

We fact-checked Sen. John Cornyn, R-Texas, who said, "Fifty-one percent — that is, a majority of American households — paid no income tax in 2009." We rated that True.

The nonpartisan Tax Policy Center, a think tank devoted to examining and understanding tax policy, recently published a paper that analyzed tax data from the Internal Revenue Service. According to the report, there are several groups that don't owe income taxes.

• About half of them qualify for very basic exemptions for people with very low incomes. Standard deductions and exemptions for dependents send these people's overall tax burden to zero.

• The next largest group is senior citizens, who get extra exemptions, and low-income working families with children, who get earned income tax credits and child tax credits.

• After that, some middle-income households don't owe taxes because of itemized deductions and credits for children and education.

• Finally, there a few high-income households that benefit from reduced tax rates on capital gains and dividends combined with itemized deductions.

It's also true that the wealthy pay most of the income taxes in the United States.

A multimillionaire CEO earning a salary would pay the top marginal rate — currently 35 percent — on everything above $379,150. (Earnings below that level are taxed at a lower rate.)

Numbers from the nonpartisan Congressional Budget Office show that the wealthy pay most of the income taxes in the United States. In 2007, the top 10 percent of taxpayers accounted for 72.7 percent of all income taxes owed. That top 10 percent included people making adjusted income of $102,900 or higher. Keep in mind, that top 10 percent accounts for 42 percent of all income earned. They paid an average tax rate of 26.7 percent.

Still, the very wealthy are most likely to reap the benefits of lower tax rates on capital gains and dividends.

"We estimate that nearly half of the benefits from the lower rates on gains and dividends goes to the top one-tenth of 1 percent of households," said Roberton Williams, a senior fellow with the Tax Policy Center. That top one-tenth includes people with incomes of $2.3 million a year or more.

Taxes, the budget

We should note that there has been a robust and detailed debate for years on why the tax rates on capital gains and dividends should be lower, or why they should not.

Broadly speaking, those on the keep-them-low side say that the lower rates stimulate investment and therefore grow the economy. They also say that because corporations already pay taxes, dividends particularly should not also be taxed.

Those on the make-them-higher side say that the lower rates have become a tax loophole, and that wealthy people find ways to claim normal income under capital gains rates. They also say that with income inequality in the United States growing, lower rates that disproportionately benefit the wealthy are unfair.

Obama didn't outline a specific policy recommendation to make sure that wealthy taxpayers pay higher rates. He suggested that some kind of policy should be implemented and talked about what tax policy "shouldn't" allow.

We spoke with the bipartisan Committee for a Responsible Federal Budget to see what they thought of the Buffett rule. Policy analyst Jason Peuquet said that a Buffett rule, combined with other aggressive tax increases on the wealthy, could raise substantial revenue for the federal government. But even the most aggressive tax increases on the wealthy would raise only $700 billion to $800 billion over 10 years, when the federal government needs to be considering deficit reduction of between $1.2 trillion and $4 trillion over that time period.

To achieve real savings, lawmakers need to look at tax code in its entirety, he said. And, they need to make reductions on the spending side, particularly on entitlement programs projected to expand due to an aging population.

"If we're shooting for that level of savings, the Buffett rule could play a part, but it's not going to be the whole solution," Peuquet said. "This could be part of the solution, but we need a comprehensive fiscal plan."

PolitiFact: Obama's call for taxing the rich is not that simple 09/24/11 [Last modified: Friday, September 23, 2011 7:40pm]
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