Buffett argues that it is unfair for high-income people to pay low taxes and says he paid an effective tax rate of 17.4 percent in 2010. He says Bosanek paid an effective rate of 35.8 percent for all federal taxes-income taxes as well as payroll taxes for Social Security and Medicare.
I wrote previously about how his math could work. Let's take a closer look now that we know exactly what Ms. Bosanek's tax rate is according to Buffett. You never know exactly what is in a tax return unless you review it, but knowing the effective rate and a few other facts, it is possible to make some educated guesses about how much income Bosanek has on her return. Why is this important? Buffett (and Obama) clearly are trying to make political points on the boss/secretary angle. The impression is left that Debbie Bosanek is a hard-working middle class taxpayer and it just shows how "unfair" it is that she is paying a higher tax rate than her boss.
I have no doubt that Ms. Bosanek is incredibly hard working. However, the tax rates that are being attributed to her are not those of a middle income taxpayer. In fact, she is probably reporting income on her return that would put her household within the top 3% of income earners in the United States as shown below.
The first thing to recognize is that Buffett seems to be taking both the employer and employee share of Social Security and Medicare taxes and considering those "paid" by Bosanek. Many economists argue this is the correct way to look at the burden of these taxes from an economic standpoint. However, I doubt that most employees think of it that way. The law is also not written this way either. The tax is considered to levied on both the employee and the employer. If the employer tax was repealed that money would not end up in the employee's pocket unless the employer decided to give the employee a raise. Therefore, Buffett is stretching the truth here if he added the employer FICA tax into her effective tax rate.
However, let's give him the benefit of the doubt. The FICA rate in 2010 was 7.65% on both the employee and employer on the first $106,800 of wages. Wages above that level are subject to a 1.45% tax on both the employee and employer (2.9% total).
Therefore, we know that Bosanek would have a 15.3% tax rate of $106,800 of income using Buffett's assumed methodology. That means to get to the 35.8% effective rate that Buffett says she paid she would have to have an effective rate of 20.5% on the rest of her income.
We know Ms. Bosanek is married and we also know that she owns two houses. That means that she is undoubtedly paying interest expense and property taxes on the houses. She is also paying Nebraska income taxes, and if she is like most taxpayers, has some amount of charitable contributions. This all means that she is probably filing a joint return and itemizing deductions. The story on Omaha.com linked above indicates she also has a son in college but I will not assume she is claiming him as a dependent. Again, a very conservative assumption.
The combination of personal exemptions for her husband and herself would have reduced her gross income by $7,300 and her deductions would have to have been at least $11,400 (the amount of the standard deduction) for the year. Let's be very conservative in this analysis and just use $20,000 for the combination of these two items. This amount must be added to the taxable income we arrive at that equals a 20.5% effective tax rate.
To arrive at an effective tax rate on joint return of 20.5% you would need taxable income of about $157,000. You can do the calculation using this template on www.moneychimp.com. Since we know that she also has at least $20,000 of exemptions and deductions, this would suggest that the adjusted gross income on her return is approaching $180,000 using these very conservative assumptions. This also assumes that none of the income is investment income such as dividends or capital gains that would only have been taxed at a maximum marginal rate of 15% (what Mr. Buffett is paying on his dividends and capital gains). This would mean her gross income was even higher.
Only 2.8% of all individual tax returns filed in 2009 (the most recent year available) had adjusted gross income in excess of $200,000 according to IRS data. Therefore, Ms. Bosanek and her husband most likely have income in excess of 97% of the households filing tax returns in this country.
Quite frankly, all the talk about tax rates and "fairness" is further evidence as to why fundamental tax reform is necessary. The fairest system is to clean out all of the exclusions, exemptions, deductions on the individual side and get rid of all of the so-called "corporate tax welfare" on the corporate side. Broaden the tax base, flatten the rate and simplify the system as I have argued for before.
Let's use the tax system to raise needed government revenue and forget about using the tax code for social and economic engineering. Embracing that philosophy would mean that there would not be so much mistrust, distrust and disgust about the tax system. A broad, flat and simple tax system should appeal to most reasonable people as everyone would be treated the same after a flat exemption. It would also dramatically reduce the ability of the federal government to serve special interests and pick winner and losers.
In the same SOTU address that President Obama was calling out Ms. Bosanek he was also saying,
It’s time to apply the same rules from top to bottom. No bailouts, no handouts, and no copouts. An America built to last insists on responsibility from everybody."That sounds like a call for a broad, flat and simple tax system. The Republicans ought to tell President Obama they are ready to get started on Monday using those principles.
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