Warren Buffett Is Trying To Fool Us Again On Tax Rates

Warren Buffett's latest pronouncement on federal tax rates, articulated in a recent campaign event for Hillary Clinton, brings to mind the old idiom: fool me once, shame on you; fool me twice, shame on me.

Buffett first fooled us in 2011, when he wrote an Op-Ed piece for the New York Times in which he made the claim that his 2010 federal tax rate of 17.4% was less than half the 36% rate paid by the rest of his office staff. This claim quickly gained traction in the political arena and became the basis of the "Buffett Rule", a tax policy mandating a minimum federal tax rate of 30% for any taxpayer with annual income over $1 million. Legislation based on the Buffett Rule was introduced in the U.S. Senate in 2012, but failed to gain passage. However, the idea lives on. Both Hillary Clinton and Bernie Sanders are campaigning on a promise to implement the "Buffett Rule" if elected president in 2016.

However, when studied closely, Buffett's federal tax rate assertion falls apart and is easily refuted. He manufactured a "federal tax rate" by leaving out taxes he should have counted, and included others he shouldn't have, to make it look like his "federal tax rate" was much lower than his office workers'. Sadly, Buffett's disingenuous assertion has been woven into the fabric of American politics. Ask anyone on the street what they know about Warren Buffett's tax rate and they will repeat the falsehood that it is "lower than his secretary's".

In mid-December, Buffett attempted to fool us again, this time while announcing his endorsement of Hillary Clinton for president.

Here is an excerpt from NYTimes.com's reporting of the endorsement announcement:

Mr. Buffett began his remarks at an event in Omaha with some stark statistics. In 1992, the top 400 wage earners in the United States made an average of $46.8 million each, compared with $335.7 million in 2012, Mr. Buffett said, using the most recent statistics available based on income tax returns.

"This group," which includes Mr. Buffett, who is worth an estimated $66.7 billion, "had their income increase sevenfold," he said, adding, however, that "their tax rate has fallen (from 26.4%) to 16.7 percent, so they got a one-third tax cut as their income went up 7 to 1."

Just like his 2011 tax rate claim, this latest assertion from Buffett is riddled with distortions and deceptions, and is based upon cherry-picked tax data and time frames.

The biggest flaw in the assertion is the fact that the bookend years of the tax rate comparison are 1992 and 2012. This period encompasses the Clinton(!) and Bush tax cuts, in which capital gains rates were reduced from 28% to 15% and the top marginal tax rate dropped from 39.6% to 35%. Okay, fair enough. But what this period fails to encompass is 2013, which is very convenient for Mr. Buffett (and his agenda) given the fact that a large federal tax increase went into effect on January 1, 2013!

This tax increase was aimed exclusively at high income taxpayers:

• The top income tax bracket on ordinary income increased from 35% to 39.6%.

• The tax rate on capital gains income increased from 15% to 20% for high income taxpayers.

• The tax rate on dividend income increased from 15% to 20% for high income taxpayers.

• A new 2.3% tax was imposed on unearned income (capital gains, dividends, and interest) for high income taxpayers.

If these higher tax rates, enacted in 2013, are applied to the 2012 income sources reported by the top 400 earners, their combined 2012 tax rate rises roughly 7% points,eliminating almost all of the 9.7% point tax rate decline (from 1992 to 2012) as noted in Buffett's assertion.

It is absolutely unconscionable and unforgivable that Mr. Buffett simply ignored this already enacted and significant tax increase, targeted at high income taxpayers, in crafting and delivering his call for higher taxes on the "super-rich".

The utilization of 2012 as the bookend year of Buffett's tax rate comparison is also flawed in another major way, this one relating to the impact that the looming 2013 tax increases had on 2012 income. Astute investors, faced with an 8.5% point or 58.7% increase in their capital gains tax rates in 2013, took steps to accelerate capital gain income into 2012. Corporations, knowing that many of their shareholders faced a 58.7% dividend tax rate increase in 2013, accelerated dividend payments into 2012. Wage and salary income was accelerated into 2012 as well. As a result:

• Total capital gain income reported by the top 400 earners increased from $54.9 billion in 2011 to $71.8 billion in 2012. In the four year period from 2008 through 2011, capital gain income reported by the top 400 earners averaged $55.0 billion.

• Total dividend income reported by the top 400 earners increased from $9.5 billion in 2011 to $21.7 billion in 2012. In the four year period from 2008 through 2011, dividend income reported by the top 400 earners averaged $10.8 billion.

• Total salary and wage income reported by the top 400 earners increased from $4.9 billion in 2011 to $10.1 billion in 2012. In the four year period from 2008 through 2011, wage and salary income reported by the top 400 earners averaged $6.5 billion.

This artificial spike in top 400 income in 2012 had a misleading impact on Buffett's income comparison. The income spike increased the multiple by which top 400 earners' incomes increased from 1992 to 2012 (7 times, as noted by Buffett). However, if 2011 is used as an endpoint year, thus eliminating the 2012 income spike, the top 400 income earners' income increase is reduced to 4.7 times 1992 income, a significantly lower (by 34%) and far less politically charged number. It should be noted, too, that the income numbers cited by Buffett are not adjusted for inflation.

Warren Buffett wants to increase federal taxes on the "super-rich", citing as evidence the claim that federal tax rates on the top 400 earners declined by 9.7% points (or roughly one-third) from 1992 to 2012 despite a seven-fold increase in their income. But this politically-charged statement loses much of its impact once it is understood that:

• Tax rates on the top 400 earners have already been increased by roughly 7% points via a subsequent federal tax increase enacted in 2013, and

• Income in the ending comparison year (2012) spiked significantly as a result of large, pending (2013) tax increases, thus inflating the top 400 income multiple (versus 1992) by almost 50%.

Taxation is an issue that should be the subject of spirited, honest, and healthy debate between competing ideologies. By all means, let's argue about tax policy and the merits of raising or lowering taxes on taxpayers at all income levels as part of this debate. But please, let's not resort, as Mr. Buffett has now done twice, to putting forth disingenuous and intellectually dishonest commentary insupport of our respective positions. The American electorate deserves better.