Taxes, Warren Buffett, and Paying My Fair Share

This week many of you will receive tax rebate checks from the I.R.S. Yes, that $600 you are receiving is meant to help kick start the economy.

The government tried the same thing in 2001, sending out $300 checks. But this time, there’s a difference — not all of us are getting a check. In fact, those earning six figures or more won’t be seeing any check this week.

So that got me to thinking about how fair the tax system really is. Do the well-off pay their fair share, or do they also deserve a tax break?

Well, let’s start with the ultra-rich. Bajillionaire Warren Buffett has argued that he isn’t being asked to pay his share. He went around his office, asking people what share of their income they pay in income taxes. Buffett’s 17.7 percent tax rate compared a bit too favorably with the 30 percent tax rate paid by his secretary.

So it appears that the tax system favors the super-rich over working stiffs.

And Buffett went a step further, putting his money where his mouth is. Last November he issued a challenge to his fellow billionaires:

I’ll bet a million dollars against any member of the Forbes 400 who challenges me that the average (federal tax rate including income and payroll taxes) for the Forbes 400 will be less than the average of their receptionists.

So far, no-one has taken him up on this bet.

What about those of us who are merely among the well-off, and not in the Buffett-stratosphere?

Now, I’m no Warren Buffett (believe me!), but I’ve just finished figuring out my federal taxes for the year. I live comfortably (one of the virtues of teaching in a business school), but was dismayed to learn that my federal taxes for 2007 amount to only 16 percent of my income.

This strikes me as astonishingly low. And it’s not like I have a fancy approach to tax minimization; I just write off a bunch of business-related expenses, and benefit enormously from deductions for mortgage interest and charitable giving. Obviously city and state taxes drive my total tax bill up a bit further, as do payroll taxes, although I plan on getting some of that back as social security in my old age.

But the point remains: I had never quite realized that the Warren Buffett problem extends far enough down the income distribution that even folks like myself aren’t paying their fair share.

So I repeated Warren Buffett’s experiment here at Wharton. And it appears that I’m paying lower taxes than the administrative staff in my department. And if it is true here, I suspect the same goes equally for most folks in the top 10 percent of income earners. (Incidentally, according to Piketty and Saez, around half of all income in the U.S. goes to those of us in the top decile — roughly anyone with a family income of six figures or more.)

Warren Buffett’s approach to casual empiricism is quite instructive. He just took a survey around the office of people’s average tax rates, finding that he paid the lowest share. Here’s a thought:

Why not run a similar survey in your own office, or among your circle of friends? It will be interesting to learn the extent to which Warren Buffett’s findings generalize.

Please post your findings in the comments.

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  1. Mercutio.Mont says:

    I must be doing something wrong. I am well into the top decile and pay over 30%.

    I rent and have no business or child deductions, so maybe that’s part of it. I’m curious how Buffet pulls it off though – his houses are worth nothing in comparison to his income and the AMT limits business deductions for the top decile.

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    • Chris says:

      He doesn’t “pull it off”. It’s a lie. You’re not doing anything wrong.

      They are simply choosing to not mention the, at minimum, 35% the distribution is taxed on before exiting the entity he is receiving the distribution from. He then pays an additional 15% on the distribution. His net tax burden on that distribution is a minimum 50%.

      Think about it – if you didn’t get hit with the 35% before it left the entity, you would be distributed an additional 35%, right? So that has to factor into your net tax liability.

      You can’t just ignore half of the transaction like Buffet has been doing when he reports his tax liability.

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  2. Matt says:

    @Mercutio.Mont

    Buffet’s case is skewed by the fact that he derives a large portion of his income not from a payroll, but from capital gains which are taxed differently.

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  3. chappy says:

    I think there is some confusion here. I suspect most of Buffets income is in the form of capital gains. The other issue is that FICA taxes (at least Social Security) end at after about $100,000. Those are really the two main tax issues at play. Everything else comes down to deductions, since the income brackets are otherwise progressive.

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  4. wylee says:

    I believe most of Buffet’s income is in the form of stock dividends – taxed at 15%.

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  5. MattH says:

    Mercutio.Mont,

    Buffett “pulls it off” because most of his income comes in the form of capital gain, which are taxed at 15%.

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  6. Adam says:

    Warren’s taxes are so low because all but 100k of his income comes from dividends and long-term capital gains. I believe he is arguing that dividends should be taxed at the ordinary income rate.

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  7. FFB says:

    Could part of it be explained by the fact that people with better incomes tend to seek out CPA’s to do their taxes? The CPA’s know more about the tax codes and what deductions a person can take. Lower down on the income ladder people may choose to do their own taxes or use software to figure it out. As a result, could it be possible that those who use professionals for their taxes are more likely to have a lower tax rate?

    Also, is it possible that those with higher incomes are more likely to own a home which provides better tax write-offs than renting does?

    Just some thoughts…

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  8. Joe says:

    I’d guess that Buffet’s rate is close to 15% because of all of the dividends that he receives compared to other sources of income. 15% times a whole lot will bring the average closer to 17% than 38% times a little.

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