The 'Buffett Rule' Is Based on Major Tax Falsehoods
Warren Buffett made headlines in 2014 when his company, Berkshire Hathaway, helped finance the purchase of Tim Hortons Inc. by Burger King. Mr. Buffett was a well-qualified advisor to the transaction, having had significant previous experience with whoppers. However, the whoppers he has been involved with previously are not of the fast-food variety. Over the past several years, he has made some very dubious and disingenuous public statements regarding federal taxes. Given his credibility, each of these assertions has been taken as gospel. However, when subjected to the bright light of fact-based research and analysis, these assertions fall apart.
Let's take a look at three of his most famous tax whoppers.
Whopper #1: Buffett's 2010 "Federal Tax Rate" was less than one-half the rate paid by his fellow office workers.
Democratic presidential candidate Hillary Clinton has made the enactment of the "Buffett Rule" a key plank of her tax platform. The "Buffett Rule" stipulates that any taxpayer making more than $1 million per year must pay a minimum federal tax rate of 30%.
The "Buffett Rule" has, as its origin, an Op-Ed piece written by Warren Buffett and published in the New York Times in August, 2011. In his essay, Buffett asserted that his 2010 "federal tax rate" of 17.4% (on taxable income of almost $40 million) was less than half of the 36.0% average rate paid by his fellow office workers. Based on this alleged 18.6 percentage point "federal tax rate" differential, Buffett called for significant tax hikes on the "super rich".
The concept of the "Buffett Rule" entered the political landscape shortly thereafter, where it has remained, unchallenged, ever since. Polling conducted in 2012 indicated that upwards of 67% of those polled supported the enactment of the "Buffett Rule".
However, Buffett's analysis of his and his office workers' 2010 "federal tax rates" is completely flawed and disingenuous. Here's why:
(1) Buffett included payroll taxes in his analysis. Roughly 15.4 percentage points of the 18.6 percentage point alleged "federal tax rate" differential Buffett claimed arose due to his inclusion of payroll taxes in his analysis.
Payroll taxes are not income taxes. Rather, they are taxes paid by taxpayers in order to qualify for future retirement income (Social Security) and health care (Medicare) entitlement programs. Historically, Social Security taxes have been assessed at a rate of 6.2% on only a limited amount of wage income ($106,800 in 2010). This taxing mechanism assured that most taxpayers paid roughly the same dollar amount of Social Security taxes each year. Because of this, taxpayers with higher wage income or with high levels of dividend and capital gains income (such as Buffett) seemingly paid a lower percent of their total income in payroll taxes. Medicare taxes have been imposed at a rate of 1.45% of all wage income.
In Buffett's case, his 2010 payroll tax bite represented 0.02% of his total income. For most of his office workers, the payroll tax bite was 7.65%, yielding a "federal tax rate" differential of 7.63 percentage points between Buffett and his fellow office workers.
This apparent payroll tax rate differential (between high-income and low-income taxpayers) becomes totally irrelevant when it is understood that all taxpayers who qualify for these programs, regardless of income level, receive roughly the same Social Security and Medicare benefits upon retirement.
The Social Security tax mechanism assures that equal taxes are paid in exchange for equal future benefits. As such, there is nothing unfair about this mechanism.
Including these taxes in a comparison based on the total income of almost any two taxpayers yields a tax rate "difference" - by virtue of basic math. However, this difference is meaningless in the context of the analysis. Worse, it is intellectually dishonest to include it.
Buffett's sleight-of-hand lies in his including "payroll taxes" in his analysis to exaggerate the alleged "federal tax rate" differences he's attempting to demonstrate. Buffett's sleight-of-hand morphs into deception when it is understood that he included, in his "federal tax rate analysis", employer-paid (matching) payroll taxes in order to double the 7.63 percentage point "federal tax rate" differential attributable to payroll taxes (noted above) to 15.36 percentage points.
(2) Buffett ignored, in his "federal tax rate" analysis, taxes he bore as a one-third owner of Berkshire Hathaway, one of the largest corporations in the world. Berkshire Hathaway had taxable income of $19.1 billion in 2010, and, using its average corporate income tax rate over the previous 5-year period of 25%, it will ultimately pay federal taxes of $4.8 billion on this income.
Given his one-third ownership interest in the company, Buffett's share of Berkshire Hathaway's taxable income and federal income taxes paid were $6.5 billion and $1.6 billion, respectively, in 2010.
There is no debate that corporate income is taxed twice, first at the corporate level (via the corporate income tax return) and then at the individual shareholder level (via their individual income tax returns) as dividend income is received. Moreover, shareholders bear these corporate income taxes, regardless of at what level they are paid.
Buffett ignored his share of the massive federal income taxes paid by Berkshire Hathaway in 2010 in compiling his "federal tax rate" analysis, presumably because these taxes (and income) do not appear on his individual federal tax return. But this is just smoke-and-mirrors. These numbers should have been included, and, due to their sheer magnitude, Buffett's corporate tax rate of 25% becomes (nearly) his effective federal income tax rate.
(3) Berkshire Hathaway paid federal taxes beyond corporate income taxes in 2010, primarily in the form of payroll taxes. It is estimated that the company paid in excess of $1.2 billion in payroll taxes in 2010, and Buffett's share of these taxes was $0.3 billion.
Buffett ignored these taxes as well in compiling his "federal tax rate" analysis. If they are included, as they should be, his "federal tax rate" jumps to 29.7%.
If you're keeping score, Buffett overstated the average "federal tax rate" of his office employees by 15.4 percentage points by erroneously including payroll taxes. If these taxes are removed from the analysis, as they should be, the average "federal tax rate" of his office workers in 2010 falls from 36.0% (as Buffett claimed) to 20.6%.
In compiling his own "federal tax rate", Buffett ignored the massive amount of corporate income and payroll taxes he bore as a one-third owner of one of the world's largest companies. If these taxes are included, as they should be, his "federal tax rate" increases to 29.6%.
Warren Buffett's claim that his 2010 "federal tax rate" was roughly 18.6 percentage points lower than the average rate paid by his office employees is completely wrong. In reality, his tax rate was 9.0 percentage points higher than theirs that year.
Whopper #2: High tax rates drove the massive job gains experienced in the 1980s.
In the same NYT Op-Ed piece, Buffett made this statement:
"And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what's happened since then: lower tax rates and far lower job creation."
This statement is patently absurd. In making this assertion, Buffett conveniently ignored the impact on job growth of both 9/11 and the Great Recession, neither of which were caused by the Bush tax cuts, which were enacted in 2001.
But the biggest fallacy in Buffett's statement is its clear implication that the strong job growth experienced in the 1980s and 1990s (and they were strong years) was fueled by relatively high federal tax rates during those years. Nothing could be further from the truth.
Ronald Reagan's tax cuts, enacted in the summer of 1981, took federal tax rates on ordinary income down 25% across the entire income spectrum. The highest marginal tax rate declined from 70% to 50%.
The rate on capital gains income was taken down to 20%. Further tax cuts, enacted in 1986, brought the highest marginal tax rate on ordinary income down to 28% (and yes, Reagan had to agree to an increase in the capital gains rate to 28% to get this overall tax cut package passed). It was Reagan's historic tax cuts that fueled the massive job growth of the 1980s and 1990s, not high federal tax rates, as implied by Buffett.
Whopper #3: Ultra-rich taxpayers experienced a one-third tax cut over the past two decades while their incomes increased seven-fold.
In December, 2015, Buffett yet again made a very misleading tax assertion, this time at a Hillary Clinton campaign event in Omaha. NYT.com, in its reporting of the event, wrote this:
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 percent) to 16.7 percent, so they got a one-third tax cut as their income went up 7 to 1."
The biggest flaw in this 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, focused exclusively on high income taxpayers. In this tax increase:
· 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 3.8% tax was imposed on unearned income (capital gains, dividends, and interest) for high income taxpayers.
These new and higher tax rates increased the effective federal tax rates of the top 400 earners by roughly 7.0 percentage points, eliminating almost all of the 9.7 percentage point tax rate decline (from 1992 to 2012) as noted in Buffett's assertion.
There is another disingenuous aspect of this instance of Buffett's tax rate deceit. Astute investors, faced with an 8.5 percentage 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.
This acceleration of income caused an artificial spike in top 400 income in 2012, which in turn spiked the multiple by which the 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 is absolutely unconscionable that Mr. Buffett, speaking in 2015 and using tax metrics covering the period from 1992 to 2012, called for higher taxes on the super-rich while totally ignoring the fact that a massive tax increase had already been imposed on high-income taxpayers in 2013.
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 at least three times, to putting forth disingenuous and intellectually dishonest commentary in support of our respective positions. The American electorate deserves better.