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.